AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1997
REGISTRATION STATEMENT NO. 333-40933
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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THE KRYSTAL COMPANY
KRYSTAL AVIATION CO.
KRYSTAL AVIATION MANAGEMENT CO.
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTER)
4812 62-0264140
TENNESSEE 62-1018532
62-1412360
TENNESSEE
TENNESSEE (I.R.S. EMPLOYER
(PRIMARY STANDARD INDUSTRIAL IDENTIFICATION NO.)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
CLASSIFICATION CODE NUMBER)
ONE UNION SQUARE
CHATTANOOGA, TENNESSEE 37402
(TELEPHONE: 423-757-1550)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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PHILIP H. SANFORD
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
THE KRYSTAL COMPANY
ONE UNION SQUARE
CHATTANOOGA, TENNESSEE 37402
(TELEPHONE: 423-757-1550)
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COPIES TO:
A. ALEXANDER TAYLOR II, ESQ.
MILLER & MARTIN
1000 VOLUNTEER BUILDING
832 GEORGIA AVENUE
CHATTANOOGA, TENNESSEE 37402
(TELEPHONE: 423-756-6600)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT AGGREGATE AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE TO BE PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER NOTE PRICE(1) FEE
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10 1/4% Senior Notes due 2007............ $100,000,000 100% $100,000,000 $30,303
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Subsidiary Guarantees of 10 1/4% Senior
Notes Due 2007 (2)...................... -- -- -- --
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) under the Securities act of 1933.
(2) Pursuant to Rule 457(n), no separate registration fee is payable with
respect to the subsidiary guarantees.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to Completion, Dated December 9, 1997
THE KRYSTAL COMPANY
OFFER TO EXCHANGE
10 1/4% SENIOR NOTES DUE 2007 ("EXCHANGE NOTES")
FOR ANY AND ALL OUTSTANDING
10 1/4% SENIOR NOTES DUE 2007 ("PRIVATE NOTES")
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[LOGO OF THE KRYSTAL COMPANY APPEARS HERE]
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON JANUARY
23, 1998 UNLESS EXTENDED.
The Krystal Company, a Tennessee corporation and the successor to TKC
Acquisition Corp. (the "Company"), hereby offers, upon the terms and subject to
the conditions set forth in this Prospectus (the "Prospectus") and in the
accompanying Letter of Transmittal (the "Letter of Transmittal," which together
with the Prospectus constitute the "Exchange Offer"), to exchange its 10 1/4%
Senior Notes due 2007 (the "Exchange Notes"), which have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
registration statement of which this Prospectus is a part (together with all
amendments and exhibits thereto, the "Registration Statement"), for an equal
principal amount of its outstanding 10 1/4% Senior Notes due 2007 (the "Private
Notes"), of which $100 million aggregate principal amount was issued on
September 26, 1997 and is outstanding on the date hereof. The Exchange Notes
and the Private Notes are sometimes collectively referred to herein as the
"Notes." The terms of the Exchange Notes are identical in all material respects
to those of the Private Notes, except for certain transfer restrictions and
registration rights relating to the Private Notes. The Exchange Notes will be
issued pursuant to, and be entitled to the benefits of, an Indenture, dated as
of September 26, 1997 (as supplemented by the Supplemental Indenture No. 1
dated as of September 26, 1997) (the "Indenture").
The Exchange Notes mature on October 1, 2007. Interest on the Exchange Notes
will be payable semi-annually on April 1 and October 1 of each year, commencing
April 1, 1998. The Exchange Notes will be redeemable on or after April 1, 2002
at the option of the Company, in whole or in part, at the redemption prices set
forth herein, plus accrued and unpaid interest, if any, to the date of
redemption. Subject to certain requirements, on or prior to April 1, 2000, the
Company may redeem up to 35% of the original principal amount of the Notes with
the net proceeds of one or more Public Equity Offerings, at a redemption price
of 110.25% of the principal amount thereof plus accrued and unpaid interest
thereon, if any, to the date of redemption. Upon a Change of Control (as
defined herein), holders of the Exchange Notes will have the right to require
the Company to purchase all or a portion of the Exchange Notes at a price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the date of purchase. See "Description of the Notes."
The Exchange Notes will be senior unsecured obligations of the Company and
will rank pari passu in right of payment with all existing and future senior
unsecured indebtedness of the Company and senior in right of payment to all
existing and future subordinated indebtedness of the Company. In addition, the
payment obligations of the Company under the Exchange Notes will be jointly and
severally guaranteed (the "Guarantees") by each of the Company's existing
subsidiaries and each of the Company's future subsidiaries (collectively, the
"Guarantors"). Each Guarantee will be a senior unsecured obligation of the
applicable Guarantor and will rank pari passu in right of payment with all
existing and future senior unsecured indebtedness of such Guarantor and senior
in right of payment to all existing and future subordinated indebtedness of
such Guarantor. The Exchange Notes and the Guarantees will be effectively
subordinated to all existing and future secured obligations of the Company and
the Guarantors. As of September 28, 1997, after giving effect to the Financing
(as defined herein), the outstanding indebtedness of the Company (including
capital lease obligations), on a consolidated basis, would have been
approximately $116.0 million, of which approximately $16.0 million would have
been secured indebtedness. See "Pro Forma Capitalization" and "Description of
the Notes."
-----------
SEE "RISK FACTORS" COMMENCING ON PAGE 15 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN INVESTMENT IN THE
EXCHANGE NOTES.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus is dated , 1997
[continued from front cover]
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m., New York City time, on January 23,
1998, unless the Exchange Offer is extended by the Company in its sole
discretion (the "Expiration Date"). Tenders of Private Notes may be withdrawn
at any time prior to the Expiration Date. Private Notes may be tendered only
in integral multiples of $1,000. The Exchange Offer is not conditioned upon
any minimum principal amount of Private Notes being tendered for exchange, but
is subject to certain customary conditions. In the event the Company
terminates the Exchange Offer and does not accept for exchange any Private
Notes, the Company will promptly return all previously tendered Private Notes
to the holders thereof. See "The Exchange Offer."
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company under the Registration Rights Agreement, dated as
of September 26, 1997 (the "Registration Rights Agreement"), between the
Company and a certain institutional accredited investor. Based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission") set forth in no-action letters issued to third parties, the
Company believes that the Exchange Notes issued pursuant to the Exchange Offer
in exchange for the Private Notes may be offered for resale, resold and
otherwise transferred by a holder thereof (other than (i) a broker-dealer who
purchased such Private Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) a
person that is an affiliate of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery requirements of the Securities Act; provided that the
holder is acquiring Exchange Notes in the ordinary course of its business and
is not participating, does not intend to participate, and has no arrangement
or understanding with any person to participate, in the distribution of the
Exchange Notes. Holders of Private Notes wishing to accept the Exchange Offer
must represent to the Company that such conditions have been met. Each broker-
dealer that receives Exchange Notes for its own account in exchange for
Private Notes, where such Private Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. The Company has agreed
that, for a period of one year after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resales. See "Plan of Distribution." The Company believes that none of the
registered holders of the Private Notes is an affiliate (as such term is
defined in Rule 405 under the Securities Act) of the Company.
The Private Notes have been designated eligible for trading by qualified
institutional investors in the Private Initial Offerings, Resales and Trading
through Automated Linkages ("PORTAL") Market of the National Association of
Securities Dealers (the "NASD"). The Company does not intend to apply for
listing of the Exchange Notes on any securities exchange or to seek approval
through any automated quotation system. There can be no assurance regarding
the future development of a market for the Exchange Notes, or the ability of
holders of the Exchange Notes to sell their Exchange Notes or the price at
which such holders may be able to sell their Exchange Notes. If such a market
were to develop, the Exchange Notes could trade at prices that may be higher
or lower than the initial public offering price depending on many factors,
including prevailing interest rates, the Company's operating results and the
market for similar securities. See "Risk Factors--Lack of a Public Market for
the Notes."
Holders of Private Notes whose Private Notes are not tendered and accepted
in the Exchange Offer will continue to hold such Private Notes and will be
entitled to all the rights and preferences and will be subject to the existing
restrictions upon transfer thereof and the Company will not have any further
obligation to such holders to provide for the registration under the
Securities Act of the Private Notes held by them.
The Company will not receive any proceeds from, and has agreed to bear all
registration expenses of, the Exchange Offer. No underwriter is being used in
connection with the Exchange Offer. See "The Exchange Offer--Resale of the
Exchange Notes."
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or any accompanying Prospectus Supplement and, if given or made,
such information or representations must not be relied upon as having been
authorized by the
1
Company, or any underwriter, agent or dealer. Neither the delivery of this
Prospectus or any such Prospectus Supplement nor any resale made thereunder
shall, under any circumstance, create an implication that there has been no
change in the affairs of the Company since the date hereof or thereof. This
Prospectus and any such related Prospectus Supplement do not constitute an
offer to sell or a solicitation or an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to
make such offer or solicitation in such jurisdiction.
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THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE SECURITIES LAWS. ALL STATEMENTS REGARDING THE COMPANY'S EXPECTED FINANCIAL
POSITION, BUSINESS AND FINANCING PLANS ARE FORWARD-LOOKING STATEMENTS.
ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-
LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH
EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH EXPECTATIONS ("CAUTIONARY
STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION,
THE INFORMATION UNDER "RISK FACTORS," "MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL SUCH
FORWARD-LOOKING STATEMENTS ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE
CAUTIONARY STATEMENTS.
----------------
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
AVAILABLE INFORMATION
This Prospectus constitutes a part of an exchange offer Registration
Statement on Form S-4 filed by the Company with the Commission under the
Securities Act with respect to the Exchange Notes. This Prospectus does not
contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. Reference is made to such Registration Statement and to the
exhibits relating thereto for further information with respect to the Company
and the Exchange Notes. Any statement contained herein concerning the
provisions of certain documents are not necessarily complete, and in each
instance, reference is made to the copy of such document filed as an exhibit
to the Registration Statement for a more complete description of the matter
involved. Each such statement is qualified in its entirety by such reference.
As the result of the filing of the Registration Statement with the
Commission, the Company will be subject to the informational requirements of
the Securities and Exchange Act of 1934, as amended (the "Exchange Act") and
in accordance therewith will be required to file with or furnish to the
Commission certain reports and other information. The Registration Statement,
the exhibits and schedules thereto, reports and other information filed with
or furnished to the Commission by the Company may be inspected at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional
offices located at Northwest Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York
10048. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Additionally, the Commission maintains a Web site on
the Internet (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that submit electronic
filings to the Commission, including the Company.
Pursuant to the Indenture, the Company has agreed, whether or not required
by the rules and regulations of the Commission, to file with the Commission
and to furnish to the Trustee (as defined herein) and to registered holders of
the Notes, without cost to the Trustee or such registered holders, reports and
other information as it would be required to file with the Commission if the
Company were subject to the reporting requirements of the Exchange Act. The
financial statements contained in such reports will be audited and reported
upon by certified public accountants.
2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data included or
incorporated by reference in this Prospectus.
THE COMPANY
The Company develops, operates and franchises quick-service restaurants
("QSRs") featuring its signature "KRYSTAL(R)" hamburger. The Company, which was
founded in Chattanooga, Tennessee in 1932, is among the earliest QSR chains in
the United States. The Company's restaurant system includes three formats: (i)
full-size restaurants operating under the name Krystal ("FSRs"); (ii) double
drive-thru restaurants operating under the name Krystal Kwik ("DDRs"); and
(iii) restaurants in non-traditional locations such as convenience stores
("NTRs," and collectively with FSRs and DDRs, the "Krystal Restaurants"). As of
September 28, 1997, the Company operated 238 FSRs and 11 DDRs in the
southeastern United States comprised of 134 owned locations and 115 leased
properties. The Company began franchising Krystal Restaurants in 1990 and as of
September 28, 1997, franchisees operated 39 FSRs, 35 DDRs and 21 NTRs. For the
52-week period ended September 28, 1997, the Company generated total revenues
of $248.0 million and EBITDA of $20.7 million from the 344 restaurants in its
system.
Krystal Restaurants feature a menu of distinctive and widely-known products
that have become integral to the Krystal identity. The Company's signature menu
item is the KRYSTAL--a small, square hamburger with steamed-in onion flavor
served hot and fresh off the grill (the "KRYSTAL"). The KRYSTAL is currently
priced in substantially all of the Company's owned and franchised restaurants
at $0.49. Offering 24-hour service in most locations, the Company believes that
its convenience and speed of service, everyday low pricing and recognizable
products are the primary competitive advantages of Krystal Restaurants. The
Company has presented itself as a clean, quick purveyor of fast-food for 65
years. With deep Southern roots and a long tradition of offering the unique
KRYSTAL hamburger, the Company has created a dedicated core of repeat customers
who view Krystal as a "destination" restaurant.
On September 26, 1997 (effective September 29, 1997 for accounting purposes),
the Company was acquired by Port Royal Holdings Inc. ("Holdings") (the
"Acquisition"). At the closing of the Acquisition, TKC Acquisition Corp.
("TKC"), a wholly-owned subsidiary of Holdings, was merged with and into the
Company (the "Merger"), and the Company as the surviving corporation retained
the name "Krystal." The Company has developed a strategic plan to increase
revenues and profits. The Company's strategy is, among other things, to (i)
significantly reduce general and administrative expenses that new Company
management believes have exceeded industry averages in recent years;
(ii) expand selectively in existing and contiguous markets to benefit from
advertising and distribution efficiencies; (iii) centralize vendor
solicitation, which the Company believes will improve purchasing power and
reduce restaurant sales costs; and (iv) capitalize on the significant brand
awareness enjoyed by Krystal Restaurants, especially that associated with the
KRYSTAL, to increase restaurant revenue.
The National Restaurant Association (the "Association"), an independent
research organization, projects QSR revenues to exceed $103.5 billion in 1997,
representing growth of 5.3% over 1996, outpacing projected growth in the
restaurant industry of 4.2% over the same period. As the dominant category
representing 48% of the QSR segment, the hamburger category is projected by
Cahners Bureau of Foodservice Research ("Cahners") to grow 6.6% in 1997. The
Company believes that it is well-positioned to take advantage of the
anticipated growth in the QSR segment in general and the hamburger category in
particular. According to a 1996 Association consumer survey, approximately 66%
of adult food consumers dine "away from home" to receive flavor and taste
sensations that cannot be easily duplicated at home. Consequently, restaurants
offering a unique product with quick service at reasonable prices enjoy a
distinct competitive advantage.
3
COMPANY STRENGTHS
STRONG BRAND NAME RECOGNITION. Krystal Restaurants operate under one of the
most highly recognized brand names in the Southeast QSR market. The Krystal
name is synonymous with the unique KRYSTAL, a small, square hamburger with a
steamed-in onion flavor served hot and fresh off the grill. The Company has
been offering quick, friendly service and unique food products at everyday low
prices for more than 65 years. The Company's long-standing market presence and
brand name recognition have generated strong consumer loyalty, making it a part
of the fabric of life in the South.
UNIQUE KRYSTAL MENU. In addition to the signature KRYSTAL, Krystal
Restaurants offer other unique items such as "Krystal Chili," "Chili Pups,"
"Corn Pups," "Chili Cheese Fries" and the "Sunriser," a specialty breakfast
sandwich.
EVERYDAY LOW PRICES. The Company believes that it offers its high-quality
hamburgers at a lower price than the leading QSR hamburger chains. The KRYSTAL,
the Company's namesake product, is currently priced at $0.49 ($0.59 with
cheese) at substantially all Krystal Restaurants. The everyday low prices have
encouraged customers to purchase the product by the "sackful" (an average of
three to four KRYSTALS per customer). Such consistent volume purchasing
supports an average check size of $3.77 and $4.09 in company-owned FSRs and
DDRs, respectively.
CONCENTRATED MARKET PRESENCE. As of September 28, 1997, the Company had a
total of 344 Company-owned and franchised restaurant locations spread
throughout the southeastern United States. By virtue of the size and regional
concentration of this restaurant system, the Company is able to leverage its
marketing and advertising expenses and benefit from distribution efficiencies.
The Company's regional concentration has created media efficient markets. The
Company believes that these media efficient markets, or designated market areas
("DMAs"), generate synergies in the area of brand name recognition.
STRENGTH OF THE SOUTHEAST MARKET. According to the Association, growth in the
QSR industry is strongly correlated with factors such as population and income
growth. Krystal Restaurants are located in the following ten states: Georgia,
Tennessee, Alabama, Florida, Mississippi, Kentucky, Arkansas, North and South
Carolina and Louisiana. The Association classifies these states under the South
Atlantic and East South Central regions and predicts that, for the foreseeable
future, both regions will experience population and personal income growth
exceeding that of the United States as a whole. The Company's DMAs are
projected to experience population growth of 1.5% and real personal income
growth of 2.9% versus the projected national averages of 1.0% and 2.3%,
respectively. Considering the strength of the Southeast market, the Company is
well-positioned to benefit from these trends.
STRONG FRANCHISE PROGRAM. The Company began franchising Krystal Restaurants
in 1990, and as of September 28, 1997 had 95 franchised restaurants,
representing over 27.6% of its total restaurant system. The Company believes
that it enjoys strong relationships with its franchisees. The demand for
Krystal franchises has grown steadily since the inception of the franchise
program. The number of franchise locations has increased at a compound annual
growth rate of 29.4% from 28 in December 1992 to 95 as of September 28, 1997.
As of the same date, the Company was in various stages of negotiation to add as
many as 51 additional units by the end of 1997. For the first nine months of
1997, the Company opened seven new franchised restaurants and from existing
commitments expects to open an additional nine restaurants by the end of 1997.
SUBSTANTIAL OWNED PROPERTIES. Over 53.8% of the Company's restaurants are
owned rather than leased, providing a significant asset base.
4
NEW MANAGEMENT TEAM. Immediately following the Acquisition, the Company named
Philip H. Sanford, as Chairman and Chief Executive Officer, and James F. Exum,
Jr., as President and Chief Operating Officer. Both Mr. Sanford and Mr. Exum
also serve as directors of the Company.
. PHILIP H. SANFORD. For the previous six years, Mr. Sanford was the Senior
Vice President, Finance and Administration of Coca-Cola Enterprises Inc.
("CCE"), the world's largest marketer, distributor and producer of bottled
and canned beverage products of The Coca-Cola Company. Mr. Sanford's
responsibilities included Human Resources, Treasury, Corporate Finance,
Risk Management, Internal Audit and Investment Management. As one of the
four principal executive officers of CCE, Mr. Sanford was significantly
involved in developing and implementing that company's broad corporate
strategy, with a particular focus on administrative management, financial
policy and acquisitions. Mr. Sanford was a senior executive with Johnston
Coca-Cola Bottling Group until it merged with CCE in 1991.
. JAMES F. EXUM, JR. Mr. Exum has served as President and Chief Executive
Officer of Pennant Foods Corp., which owns and operates 75 Wendy's
restaurants, since 1995. From 1991 to 1995, Mr. Exum served as President
and Chief Executive Officer of Southern California Food Services Corp.,
the predecessor to Pennant Foods Corp. Mr. Exum started in the QSR
hamburger industry in 1975 as a management trainee in a Chattanooga
Wendy's restaurant while attending college and has held every significant
position in a QSR hamburger chain.
BUSINESS STRATEGY
The Company's business strategy is to cut costs, primarily at the corporate
level, increase same-restaurant sales and add new restaurants, both company-
owned and franchised, on a selective basis. This strategy is based on the
following elements:
SIGNIFICANTLY REDUCE COST STRUCTURE. The Company's new management has
identified a number of cost savings opportunities that will improve the
Company's earnings. Management believes that the Company has maintained
disproportionately large corporate overhead expenses in relation to its
restaurant operations. The Company plans to improve profitability by
rationalizing the cost structure to bring expenses in line with industry
averages. Management believes it can achieve annual cost savings in excess of
$4.7 million by:
. Reducing Headcount. During the Company's 65-year history of family-
controlled management, a number of positions were created, primarily at
the corporate level, which in the Company's opinion were unnecessary. The
Company believes that streamlining corporate functions to resemble a head
office structure similar to that of its competitors and imposing rigid
expense controls will generate significant cost savings both from the
reduction in headcount and the associated overhead costs.
. Revamping Purchasing Strategy. The Company currently negotiates its
purchasing contracts directly with individual product vendors. The Company
also utilizes three different jobbers to warehouse and distribute the
supplies purchased from its product vendors. The Company intends to
centralize its purchasing by using one jobber instead of three and
permitting that one jobber to conduct direct negotiations with each
product vendor. The Company believes that this consolidation will allow
the Company to benefit from the size and regional concentration of its
restaurant system.
. Outsourcing Selected Functions. The Company currently performs internally
a variety of corporate tasks, such as certain tax functions and
information systems development, that could be performed more efficiently
by external sources. In the Company's opinion, certain areas of "home
grown" expertise have become uneconomical to maintain considering the
availability of industry specialists. Outsourcing functions will reduce
the associated overhead and allow the Company to keep up with certain
industry practices.
5
GROWTH OPPORTUNITIES. The Company plans to develop new Krystal Restaurants in
existing markets where the Company has an established presence, enabling the
Company to benefit from advertising and distribution efficiencies. The Company
also plans to pursue expansion into carefully selected contiguous markets to
permit overlap benefits from neighboring markets with respect to advertising
and brand name recognition. The Company intends to target restaurant growth in
DMAs where it can achieve, or the Company has already achieved, sufficient
penetration to justify television advertising.
INCREASE FRANCHISED RESTAURANTS. The Company believes that significant
opportunities exist to increase the number of franchised Krystal Restaurants.
System expansion through franchising can provide significant additional revenue
growth with a low level of investment by the Company. Existing and potential
franchisees have expressed interest in developing Krystal Restaurants in areas
inside and outside of the Company's existing and contiguous markets. The
Company expects to evaluate and, where appropriate, pursue such opportunities
with the intent of widening Krystal's brand name recognition at relatively low
risk and cost to the Company. In the near term, franchise location selection
will focus on "filling in" existing DMAs to improve market efficiencies and
provide suitable support for new franchise entrants.
ENHANCE KRYSTAL BRAND RECOGNITION. In 1996, the Company granted an exclusive
worldwide license to the Jimmy Dean Foods Division of Sara Lee Corporation to
manufacture, distribute and sell frozen KRYSTALS into grocery and warehouse
channels. This license has a five-year term with an optional five-year renewal
clause. The concept has been in test marketing since early 1997 in the
Birmingham-Montgomery, Alabama and Tampa-Orlando, Florida markets. The
Company's management believes there are many similar opportunities to
capitalize on the Krystal brand name in venues other than restaurants.
UPGRADE AND LEVERAGE INFORMATION TECHNOLOGY. Currently, the Company relies on
various proprietary software packages installed on mainframe computers to
control functions including accounting, labor scheduling, payroll and
purchasing. The Company believes these applications are outdated and should be
replaced with off-the-shelf programs designed specifically for the restaurant
industry. Such software upgrades would require the replacement of the Company's
mainframes with a client-server system. The costs associated with such software
and hardware upgrades would, in the Company's opinion, be more than offset by
the increased productivity of the required accounting staff, improved labor
scheduling and more efficient delivery of the real-time information required by
management to effectively allocate resources in making price, product and
promotional decisions.
FOCUS ON UNIQUE, QUALITY PRODUCTS AND SUPERIOR CUSTOMER SERVICE. The Company
intends to refocus operations on the core values upon which the Company was
founded. This involves reemphasizing quality food at everyday low prices served
by a friendly staff in clean restaurants. The Company will redesign training
and incentive programs to reorient staff and management toward these goals.
RECENT RESULTS
During the nine-month period ended September 28, 1997, the Company generated
sales of $178.8 million, which represents an increase of 1.9% over the same
period for the previous year and a 3.1% increase in company-operated same-
restaurant sales. The increase in sales was primarily a result of the 6.5%
growth in average check size in Company-operated restaurants to $3.78 from
$3.55 for the nine-month periods ended September 28, 1997 and September 29,
1996 respectively. Operating income increased $1.6 million to $6.0 million
(3.3% of sales) from $4.4 million (2.4% of sales) during the same period for
the previous year.
THE ACQUISITION
Pursuant to the Agreement and Plan of Merger dated as of July 3, 1997 (the
"Merger Agreement"), on September 26, 1997, Holdings acquired the Company (the
"Acquisition") for an aggregate purchase price equal to $108,403,276. At the
closing of the Acquisition (the "Acquisition Closing"), TKC, a wholly-owned
6
subsidiary of Holdings, merged with and into the Company (the "Merger")
pursuant to the Merger Agreement and the Company as the surviving corporation
retained the name "Krystal." As a result of the Acquisition and Merger,
Holdings became the owner of 100% of the common stock of the Company.
Holdings and TKC were formed to consummate the Acquisition and Merger. Of the
$35.0 million of Holdings' capital stock issued in connection with the
Acquisition, Philip H. Sanford, the Chairman and Chief Executive Officer of the
Company, purchased $5.0 million. Holdings contributed such funds and an
additional $30.0 million raised from private investors to TKC to effect the
Acquisition.
The purchase price for the Acquisition, together with $7.3 million of related
fees and expenses, were funded through (i) a $35.0 million equity contribution
from Holdings to TKC funded by a private equity placement (the "Equity
Contribution"), (ii) borrowings under a new credit facility with SunTrust Bank,
Atlanta, as agent (the "Credit Facility") and (iii) the net proceeds of the
offering of the Private Notes ((i), (ii) and (iii) collectively referred to
herein as the "Financing").
THE EXCHANGE OFFER
The Exchange Offer ..... The Company is hereby offering to exchange Exchange
Notes for an equal principal amount of Private Notes
that are properly tendered and accepted. As of the
date hereof, there is $100 million aggregate
principal amount of Private Notes outstanding. See
"The Exchange Offer."
Based on interpretations by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer in
exchange for Private Notes may be offered for resale,
resold and otherwise transferred by a holder thereof
(other than (i) a broker-dealer who purchased such
Private Notes directly from the Company to resell
pursuant to Rule 144A or any other available
exemption under the Securities Act, or (ii) a person
that is an affiliate of the Company within the
meaning of Rule 405 under the Securities Act),
without compliance with the registration and
prospectus delivery requirements of the Securities
Act; provided that the holder is acquiring Exchange
Notes in the ordinary course of its business and is
not participating, does not intend to participate,
and has no arrangement or understanding with any
person to participate, in the distribution of the
Exchange Notes. Holders of Private Notes wishing to
accept the Exchange Offer must represent to the
Company that such conditions have been met. Each
broker-dealer that receives Exchange Notes for its
own account in exchange for Private Notes, where such
Private Notes were acquired by such broker-dealer as
a result of market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities
Act in connection with any resale of such Exchange
Notes.
This Prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in
exchange for Private Notes acquired by such broker-
dealer as a result of market-making activities or
other trading activities. The Letter of Transmittal
that accompanies this Prospectus states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not
7
be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. Any holder of
Private Notes who tenders in the Exchange Offer with
the intention to participate in a distribution of the
Exchange Notes could not rely on the above-referenced
position of the staff of the Commission and, in the
absence of an exemption under the Securities Act,
would have to comply with the registration and
prospectus delivery requirements contained therein in
connection with any resale transaction. Failure to
comply with such requirements in such instance could
result in such holder incurring liability under the
Securities Act for which the holder is not
indemnified by the Company. See "The Exchange Offer--
Resale of the Exchange Notes."
Expiration Date ........ The Exchange Offer will expire at 5:00 p.m., New York
City time, on January 23, 1998, unless the Exchange
Offer is extended by the Company in its sole
discretion, in which case the term "Expiration Date"
shall mean the latest date and time to which the
Exchange Offer is extended. See "The Exchange Offer--
Expiration Date; Extensions; Amendments."
Conditions to the The Exchange Offer is subject to certain customary
Exchange Offer......... conditions that may be waived by the Company. The
Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Private Notes being
tendered for exchange. See "The Exchange Offer--
Conditions."
Procedures for
Tendering
Private Notes .......... Each holder of Private Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with such
Private Notes and any other required documentation to
SunTrust Bank, Atlanta, as exchange agent (the
"Exchange Agent"), at the address set forth herein.
See "The Exchange Offer--Procedures for Tendering."
Special Procedures for
Beneficial Owners ...... Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender such Private Notes in the
Exchange Offer should contact such registered holder
promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such beneficial
owner's behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering such owner's Private Notes, either make
appropriate arrangements to register ownership of the
Private Notes in such owner's name or obtain a
properly completed bond power form the registered
holder. The transfer of registered ownership may take
considerable time and may not be able to be completed
prior to the Expiration Date. See "The Exchange
Offer--Procedures for Tendering."
8
Guaranteed Delivery Holders of Private Notes who wish to tender their
Procedures............. Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any other
documentation required by the Letter of Transmittal
to the Exchange Agent prior to the Expiration Date
must tender their Private Notes according to the
guaranteed delivery procedures set forth under "The
Exchange Offer--Guaranteed Delivery Procedures."
Acceptance of the Private
Notes and Delivery of the
Exchange Notes ........ Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company will
accept for exchange any and all Private Notes that
are properly tendered in the Exchange Offer prior to
the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered on
the earliest practicable date following the
Expiration Date. See "The Exchange Offer--Terms of
the Exchange Offer."
Withdrawal Rights ...... Tenders of Private Notes may be withdrawn at any time
prior to the Expiration Date. See "The Exchange
Offer--Withdrawal of Tenders."
Certain Tax For a discussion of certain tax considerations
Considerations......... relating to the Exchange Notes, see "Certain U.S.
Federal Income Tax Considerations."
Exchange Agent ......... SunTrust Bank, Atlanta, is serving as the Exchange
Agent in connection with the Exchange Offer. SunTrust
Bank, Atlanta, also serves as trustee (the "Trustee")
under the Indenture.
SUMMARY OF THE TERMS OF THE EXCHANGE NOTES
The Exchange Offer applies to the $100 million aggregate principal amount of
the Private Notes. The form and terms of the Exchange Notes are identical in
all material respects to the form and terms of the Private Notes except that
(i) the Exchange Notes will be registered under the Securities Act, and
therefore will not bear legends restricting the transfer thereof and (ii)
holders of the Exchange Notes will not be entitled to any of the registration
rights of holders of the Private Notes under the Registration Rights Agreement.
See "The Exchange Offer--Terms of the Exchange Offer." The Exchange Notes will
evidence the same indebtedness as the Private Notes (which they replace) and
will be issued under and entitled to the benefits of the Indenture. For further
information and for definitions of certain capitalized terms, see "Description
of the Notes."
Maturity Date........... October 1, 2007
Interest Payment Dates.. Interest on the Exchange Notes will be payable semi-
annually commencing April 1, 1998.
Ranking................. The Exchange Notes will be senior unsecured
obligations of the Company ranking pari passu with
all existing and future senior unsecured indebtedness
of the Company and senior in right of payment to all
existing and future subordinated indebtedness of the
Company. The Exchange Notes will be effectively
subordinated in right of payment to all existing and
future secured indebtedness of the Company (including
indebtedness incurred under the Credit Facility) to
the extent of the value of the assets securing such
indebtedness. As of September 28, 1997, after giving
effect to the Financing and the application of the
proceeds therefrom as well as outstanding letters of
credit, the Company would have had $5.5 million of
revolving credit availability under the Credit
Facility.
9
Guarantees.............. The Exchange Notes will be unconditionally guaranteed
on a senior basis by Krystal Aviation Co., Krystal
Aviation Management Co. and all other existing and
future subsidiaries of the Company (each, a
"Guarantor"). The Guarantees will be general senior
unsecured obligations of each Guarantor and will rank
pari passu in right of payment with all existing and
future senior unsecured indebtedness of each
Guarantor and senior in right of payment to all
existing and future subordinated indebtedness of each
Guarantor. The Guarantees will be effectively
subordinated in right of payment to all secured
indebtedness of each Guarantor (including each
Guarantor's guarantee of the Credit Facility) to the
extent of the value of the assets securing such
indebtedness.
Optional Redemption..... The Exchange Notes will be redeemable, in whole or in
part, at the Company's option on or after April 1,
2002, at the redemption prices set forth herein, plus
accrued and unpaid interest, and Additional Interest
(as defined herein), if any, to the date of
redemption.
In addition, at any time prior to April 1, 2000, the
Company may, at its option, redeem up to 35% of the
aggregate principal amount of Notes originally issued
with the net proceeds of one or more Public Equity
Offerings (as defined herein) of the Company or of a
capital contribution resulting from one or more
Public Equity Offerings made by Holdings at a
redemption price equal to 110.25% of the aggregate
principal amount thereof together with accrued and
unpaid interest and Additional Interest, if any, to
the date of redemption payment; provided, however,
that after such redemption the aggregate principal
amount of the Notes outstanding must equal at least
65% of the aggregate principal amount of the Notes
originally issued and provided, further, that such
redemption shall occur within 60 days of the date of
closing of such Public Equity Offering.
Mandatory Redemption.... None.
Change of Control....... Upon a Change of Control, each holder of Exchange
Notes will have the right to require the Company to
purchase all or any part of such holder's Exchange
Notes at a purchase price in cash equal to 101% of
the aggregate principal amount thereof plus accrued
and unpaid interest, including Additional Interest,
if any, to the date of purchase.
Certain Covenants....... The Indenture pursuant to which the Exchange Notes
will be issued (the "Indenture") contains certain
covenants that limit the ability of the Company and
its subsidiaries to, among other things, incur
additional indebtedness, pay dividends or make
certain restricted payments, consummate certain asset
sales, incur liens, enter into sale and leaseback
transactions, enter into certain transactions with
affiliates, merge or consolidate with any other
person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the
Company's assets. In addition, under certain
circumstances, the Company will be required to offer
to purchase the Exchange Notes, in whole or in part,
at a purchase price equal to 100% of the aggregate
principal amount thereof plus accrued and unpaid
interest, including Additional Interest, if any, to
the date of purchase, with the net cash proceeds of
certain Asset Sales (as defined herein).
10
USE OF PROCEEDS
Neither the Company nor the Guarantors will receive any proceeds from the
Exchange Offer.
RISK FACTORS
See "Risk Factors" as well as other information and data included in this
Prospectus for a discussion of certain factors that should be considered in
evaluating an investment in the Exchange Notes.
11
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER INFORMATION
(DOLLARS IN THOUSANDS)
The information in this table should be read in conjunction with "Selected
Historical Consolidated Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and the notes thereto appearing elsewhere in this
Prospectus.
YEAR ENDED (1) NINE MONTHS ENDED
---------------------------------------------------------- ---------------------------
JANUARY 3, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1993 1994 1995 1995 1996 1996 1997
---------- ---------- ---------- ------------ ------------ ------------- -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Revenues:
Restaurant sales....... $226,302 $228,468 $239,104 $239,376 $236,470 $175,401 $178,815
Franchise fees......... 487 533 796 618 349 171 219
Royalties.............. 774 1,157 1,880 2,420 2,778 2,021 2,232
Other revenue.......... 4,562 6,575 6,542 5,614 4,671 3,409 3,469
-------- -------- -------- -------- -------- -------- --------
Total revenues......... 232,125 236,733 248,322 248,028 244,268 181,002 184,735
Cost of restaurant
sales.................. 178,543 182,530 192,256 197,031 195,733 145,847 148,393
Depreciation and
amortization expense... 8,823 9,881 11,213 12,311 11,378 8,447 8,216
General and
administrative expense. 25,166 24,781 25,775 25,770 25,422 19,567 19,656
Other operating
expenses, net.......... 4,111 5,651 4,946 4,417 3,809 2,742 2,444
Special charges and
provision for loss on
restaurant closings and
property write-downs... -- -- 2,000 13,911 4,000 -- --
-------- -------- -------- -------- -------- -------- --------
Operating income (loss). $ 15,482 $ 13,890 $ 12,132 $ (5,412) $ 3,926 $ 4,399 $ 6,026
======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA (2).............. $ 24,305 $ 23,771 $ 25,345 $ 20,810 $ 19,304 $ 12,846 $ 14,242
EBITDA margin (3)....... 10.5% 10.0% 10.2% 8.4% 7.9% 7.1% 7.7%
Capital expenditures
(4):
Maintenance capital
expenditures.......... $ 4,826 $ 6,209 $ 5,814 $ 5,941 $ 5,290 $ 3,355 $ 4,125
Renovation............. 2,366 2,027 1,943 2,461 603 368 447
New restaurant
development........... 2,083 17,068 17,697 3,806 -- -- --
Other.................. 758 827 1,199 4,099 564 426 935
-------- -------- -------- -------- -------- -------- --------
Total capital
expenditures.......... $ 10,033 $ 26,131 $ 26,653 $ 16,307 $ 6,457 $ 4,149 $ 5,507
======== ======== ======== ======== ======== ======== ========
12
YEAR ENDED (1) NINE MONTHS ENDED
---------------------------------------------------------- ---------------------------
JANUARY 3, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1993 1994 1995 1995 1996 1996 1997
---------- ---------- ---------- ------------ ------------ ------------- -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
BALANCE SHEET DATA (AT
END OF PERIOD):
Net book value of
property and
equipment (5).......... $ 66,974 $ 85,761 $ 100,888 $ 100,409 $ 92,826 $ 94,497 $ 90,034
Total assets............ 98,657 105,972 130,786 132,695 143,870 137,886 119,130
Total debt and capital
lease obligations (6).. 35,653 32,546 47,584 43,460 42,789 42,907 38,973
Total shareholders'
equity................. 36,642 44,728 51,636 46,647 44,688 46,588 46,279
RESTAURANT DATA
(UNAUDITED) (7):
Systemwide restaurant
sales
Owned.................. $ 226.3 $ 228.5 $ 239.1 $ 239.4 $ 236.5 $ 175.4 $ 178.8
Franchised............. 17.4 25.8 42.3 54.0 61.1 44.5 49.4
Total.................. 243.7 254.3 281.4 293.4 297.6 219.9 228.2
Systemwide restaurants
open, end of period
Owned.................. 231 240 252 256 249 250 249
Franchised............. 28 44 65 80 89 83 95
Total.................. 259 284 317 336 338 333 344
- --------
(1) The Company has a 52/53-week fiscal year ending on the last Sunday in
December which normally consists of 13 four-week periods. The fiscal year
ended December 29, 1996 included 52 weeks of operations.
(2) EBITDA represents income from operations plus depreciation and
amortization, adjusted for non-cash items related to gain/losses on asset
dispositions and write-downs. EBITDA should not be construed as a substitute
for income from operations or a better indicator of liquidity than cash flow
from operating activities, which is determined in accordance with generally
accepted accounting principles. EBITDA is included herein to provide
additional information with respect to the ability of the Company to meet
its future debt service, capital expenditure and working capital
requirements. In addition, management believes that certain investors may
find EBITDA to be a useful tool for measuring the ability of the Company to
service its debt. EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs. See the Consolidated Statements of Cash
Flows of the Company and the related notes to the Consolidated Financial
Statements thereto included elsewhere in this Prospectus.
(3) EBITDA margin represents EBITDA divided by total revenues.
(4) Capital expenditures (excluding expenditures funded through capital leases)
have been segregated into the following categories to provide additional
information:
Maintenance capital expenditures represents day-to-day expenditures related
to restaurant equipment replacements and general restaurant capital
improvements.
Renovation represents significant restaurant renovations and upgrades
pursuant to the Company's renovation activities with respect to company
operated restaurants.
New restaurant development represents new company-operated restaurant
construction and development.
Other represents capital expenditures at various corporate offices and new
restaurant equipment such as fryers and security systems.
(5) Net book value of property and equipment includes leased properties (under
capital leases).
(6) For the fiscal years ended December 31, 1995, September 29, 1996 and
December 29, 1996, unsecured senior notes totaling $36 million are reflected
on the Company's balance sheets as part of "Liabilities subject to
compromise." For purposes of this table, the Notes are included in "Total
debt and capital lease obligations."
(7) Represents restaurant sales for all franchised and company-operated
restaurants. Sales information for franchised restaurants are as reported by
franchisees or, in some instances, estimated by the Company based on other
data, and is unaudited.
13
SUPPLEMENTAL SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following presents supplemental summary unaudited pro forma consolidated
financial data of the Company, giving effect to the Financing, the Acquisition
and the cost savings adjustments as if they had occurred on January 1, 1996.
The supplemental summary unaudited pro forma consolidated financial data does
not purport to represent what the Company's results of operations actually
would have been if the Financing and Acquisition had occurred as of the date
indicated or what such results will be for any future periods. The information
in this table should be read in conjunction with "Unaudited Pro Forma Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements and the notes
thereto appearing elsewhere in this Prospectus.
TWELVE
NINE MONTHS ENDED MONTHS
FISCAL YEAR ENDED ------------------------------------- ENDED
DECEMBER 29, 1996 SEPTEMBER 29, 1996 SEPTEMBER 28, 1997 SEPTEMBER 28, 1997
----------------- ------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Total revenues.......... $244,268 $181,002 $184,735 $248,001
Cost of restaurant
sales.................. 195,096 145,369 147,915 197,642
Depreciation and amorti-
zation................. 14,014 10,424 10,193 13,783
General and administra-
tive expense........... 21,299 16,475 16,564 21,388
Other operating expense. 3,809 2,742 2,444 3,511
Special charges and
provision for loss on
restaurant closings and
property write-downs... 4,000 -- -- 4,000
-------- -------- -------- --------
Operating income........ 6,050 5,992 7,619 7,677
Interest expense........ 12,015 9,013 9,016 12,018
Interest income......... (619) (674) (371) (316)
Reorganization expense.. 3,846 2,288 1,218 2,776
-------- -------- -------- --------
Loss before income taxes
and extraordinary item. (9,192) (4,635) (2,244) (6,801)
Income tax benefit...... (2,868) (1,292) (443) (2,019)
-------- -------- -------- --------
Loss before
extraordinary item..... $ (6,324) $ (3,343) $ (1,801) $ (4,782)
======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(1)............... $ 24,064 $ 16,416 $ 17,812 $ 25,460
EBITDA margin(2) 9.9% 9.1% 9.6% 10.3%
Cash interest expense... $ 11,437 $ 8,579 $ 8,582 $ 11,440
EBITDA/Interest expense. 2.0 1.8 2.0 2.1
EBITDA/Cash interest ex-
pense.................. 2.1 1.9 2.1 2.2
Ratio of long term debt
to EBITDA.............. 4.5
SEPTEMBER 28, 1997
------------------
BALANCE SHEET DATA:
Property, buildings and equipment............................ $111,673
Total assets................................................. 196,424
Long term debt and capital lease obligations................. 115,641
Total debt and capital lease obligations..................... 115,964
Total shareholders' equity................................... 35,000
- --------
(1) EBITDA represents income from operations plus depreciation and
amortization, adjusted for non-cash items related to gain/losses on asset
dispositions and write-downs. EBITDA should not be construed as a
substitute for income from operations or a better indicator of liquidity
than cash flow from operating activities, which is determined in accordance
with generally accepted accounting principles. EBITDA is included herein to
provide additional information with respect to the ability of the Company
to meet its future debt service, capital expenditure and working capital
requirements. In addition, management believes that certain investors may
find EBITDA to be a useful tool for measuring the ability of the Company to
service its debt. EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs.
(2) EBITDA margin represents EBITDA divided by total revenues.
14
RISK FACTORS
An investment in the Exchange Notes represents a high degree of risk. There
are a number of factors, including those specified below, which may adversely
affect the Company's ability to make payments on the Exchange Notes. Holders
of Exchange Notes could therefore lose a substantial portion or all of their
investment in the Exchange Notes. Consequently, an investment in the Exchange
Notes should only be considered by persons who can assume such risk. The risk
factors described below are not necessarily exclusive and each potential
investor is encouraged to perform its own investigation with respect to the
Company.
This Prospectus contains forward-looking statements, including statements
regarding, among other items, (i) the expected realization of the Company's
business strategy and the cost savings estimated to be achieved in connection
therewith and the costs associated therewith, (ii) the sufficiency of cash
flow and other sources of liquidity to fund the Company's debt service
requirements, working capital needs and other significant expenditures and
(iii) anticipated trends in QSR food industry, including with respect to
adverse changes in national or local economic conditions, competition from
other restaurants and changes in the availability, cost and terms of
financing. Forward-looking statements are typically identified by the words
"believe," "expect," "anticipate," "intend," "estimate," "project" and similar
expressions. These forward-looking statements are subject to a number of risks
and uncertainties, many of which are beyond the Company's control. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, actual results could differ materially from those
contemplated by these forward-looking statements as a result of factors
including those described below. In light of these risks and uncertainties,
there can be no assurance that the results and events contemplated by the
forward-looking information contained in this Prospectus will in fact occur.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. The Company does not undertake
any obligation to update or revise any forward-looking statement.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company has incurred significant indebtedness. On a pro forma basis,
after giving effect to the Financing and the Acquisition as if each had
occurred on September 28, 1997 and the application of the net proceeds
therefrom, the Company's aggregate consolidated indebtedness (including
capital lease obligations) would have been $116.0 million, shareholders'
equity would have been $35.0 million and the Company would have had undrawn
commitments of $10.3 million under the Credit Facility. In addition, subject
to the restrictions in the Credit Facility and the Indenture, the Company may
incur additional indebtedness from time to time to finance capital
expenditures or for other purposes. See "Description of Credit Facility" and
"Description of the Notes." Substantially all of the Company's assets have
been pledged to secure the Credit Facility.
The level of the Company's indebtedness could have important consequences
for holders of the Notes, including: (i) a substantial portion of the
Company's cash flow from operations must be dedicated to service debt and will
not be available for other purposes; (ii) the Company's ability to obtain
additional debt financing in the future for working capital, capital
expenditures and other needs may be limited; and (iii) the Company's level of
indebtedness could limit its flexibility in reacting to changes in the
industry in which it competes and economic conditions in general. Certain of
the Company's competitors currently operate on a less leveraged basis and have
significantly greater operating flexibility than the Company.
The Company's ability to pay interest on the Notes, to repay portions of its
long-term indebtedness (including the Notes) and to satisfy its other debt
obligations will depend on its future operating performance and the
availability of refinancing indebtedness, which will be affected by prevailing
economic conditions and financial, business and other factors, certain of
which are beyond the Company's control. The Company anticipates that its
operating cash flow, together with borrowings under the Credit Facility, will
be sufficient to meet its operating needs and to meet its debt service
requirements as they become due, assuming that the Company achieves a
significant portion of the cost reduction components of its business strategy.
See "Description of Business--Business Strategy." However, if that is not the
case, the Company will be forced to
15
seek alternatives that may include reducing or delaying capital expenditures,
selling assets, restructuring or refinancing its indebtedness or seeking
additional equity capital. There can be no assurance that any such strategy
could be effected on satisfactory terms, if at all. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RECENT FINANCIAL PERFORMANCE; SIGNIFICANT EXPENDITURES; DEPENDENCE ON
SUCCESSFUL IMPLEMENTATION OF BUSINESS STRATEGY
The Company experienced a loss of $2.4 million for the 52 weeks ended
December 29, 1996 and net income of $1.4 million for the nine months ended
September 28, 1997. In order to meet its fixed payment obligations and retain
sufficient borrowing availability under the Credit Facility to satisfy its
working capital requirements, the Company must achieve significant cash flow
from operations which requires it to improve its operating results
significantly. In order to improve operating results, the Company must, among
other things, enhance the Company's brand-name recognition and reduce
operating expenses. In the event that the operating improvements from
management's business strategy are materially less than estimated and/or
require a longer time frame than anticipated, the Company's ability to service
its debt and pay its other fixed charges could be adversely affected.
The estimated cost savings described under "Description of Business--
Business Strategy," represent the Company's current estimates of cost savings
from implementation of management's business strategy. These estimated future
cost savings are based upon a number of assumptions that may not be accurate,
in which case the actual results of such business strategy may differ
materially from these estimates. Moreover, these estimates relate only to
estimated cost reductions on the items described and therefore are not
necessarily indicative of the Company's financial results, including EBITDA
and net income, which are affected by a number of other factors, including
demand for and pricing of the Company's products and other costs associated
with operating the Company.
In the event that the Company's cash flow from operations is less than
anticipated or its cash expenditures are greater than anticipated and
available borrowings under the Credit Facility are used, there can be no
assurance that the Company can raise additional funds through equity or debt
financings or asset sales given the financial and other covenants to which the
Company is subject under the Indenture and the Credit Facility, uncertainty
regarding the Company's future operating performance and the pledge of
substantially all of the Company's assets to secure the Credit Facility.
GROWTH STRATEGY
As part of its business strategy, the Company intends to pursue selected new
expansion opportunities. These depend upon a number of factors (some of which
are beyond the control of the Company), such as the availability and cost of
suitable locations, the hiring, training and retention of skilled management
and personnel, the availability of adequate financing and the selection of
franchisees. There can be no assurance that the Company or its franchisees
will be able to open planned new restaurants or that, if opened, these
restaurants can be operated profitably. The Company may also make selective
acquisitions, depending on, among other factors, the availability of suitable
acquisition prospects and appropriate financing. There can be no assurance
that the Company will be able to acquire additional restaurants, or that, if
acquired, such restaurants will be successfully converted to the Company's
system.
COMPETITION
The QSR industry is highly competitive with respect to price, product
quality, variety and taste, speed of service, convenience of location and
restaurant cleanliness and upkeep. Factors such as inflation, increases in
food, labor (including health care) and energy costs and the availability of
an adequate number of hourly-paid employees also affect the QSR industry. In
each of its markets, the Company competes with large national QSR chains, some
of which have greater financial resources than the Company, as well as
regional QSR chains, convenience stores and other local restaurants offering
moderately priced menus. To the extent that competitors of the Company offer
items that are better priced or more appealing to consumer tastes or if such
competitors increase the number of restaurants operated in one of the
Company's targeted markets, such events could have a
16
material adverse effect on the Company's financial condition and results of
operations. With respect to the sale of franchises, the Company competes with
many franchisors of restaurants and other business concepts.
EFFECTIVE SUBORDINATION OF NOTES TO SECURED INDEBTEDNESS
The Notes are senior unsecured obligations of the Company and are
effectively subordinated in right of payment to all existing and future
secured indebtedness of the Company (including indebtedness incurred under the
Credit Facility) to the extent of the value of the assets securing such
indebtedness. The Guarantees are general unsecured senior obligations of each
Guarantor and are effectively subordinated in right of payment to all secured
indebtedness of each Guarantor (including each Guarantors' guarantee of the
Credit Facility) to the extent of the value of the assets securing such
indebtedness. The Credit Facility is secured by substantially all of the
assets of the Company and each Guarantor (as well as a pledge of all of the
Company's common stock held by Holdings) and, therefore, claims of holders of
the Notes will be effectively subordinated to the extent of the value of the
assets securing the Credit Facility.
RESTRICTIVE DEBT COVENANTS
The Indenture contains certain covenants that limit the ability of the
Company and the Guarantors to, among other things, incur additional
indebtedness, pay dividends or make certain restricted payments, consummate
certain asset sales, incur liens, enter into sale and leaseback transactions,
enter into certain transactions with affiliates, merge or consolidate with any
other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of the Company's assets. In addition, the Credit
Facility contains other and more restrictive covenants and prohibits the
Company from prepaying the Notes, except in certain circumstances. The Credit
Facility requires the Company to maintain specified financial ratios and
satisfy certain financial tests. The Company's ability to meet such financial
ratios and tests may be affected by events beyond its control. There can be no
assurance that the Company will meet such tests. A breach of these covenants
could result in an event of default under the Credit Facility. If such an
event of default occurs, the lenders under the Credit Facility could elect to
declare all amounts borrowed under the Credit Facility, together with accrued
and unpaid interest, to be immediately due and payable and to terminate all
commitments under the Credit Facility. If the Company were unable to repay all
amounts declared due and payable, the lenders could proceed against the
collateral granted to them to satisfy the indebtedness and other obligations
due and payable. If indebtedness under the Credit Facility were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay in full such indebtedness and the other indebtedness of
the Company, including the Notes. See "Description of the Notes--Certain
Covenants" and "Description of Credit Facility."
CONTROL BY PRINCIPAL STOCKHOLDERS
All of the Company's common stock is beneficially owned by Holdings.
Holdings controls the Company and has the power to elect all of its directors,
appoint new management and approve any action requiring the approval of the
holders of the Company's common stock, including adopting amendments to the
Company's charter and approving mergers or sales of substantially all of the
Company's assets. The directors elected by Holdings have the authority to make
decisions affecting the capital structure of the Company, including the
issuance of additional capital stock and the declaration of dividends. Under a
shareholder's agreement by and among Holdings and the shareholders of
Holdings, the board of directors of Holdings consists of five members, two of
whom are appointed by Mr. Sanford. See "Management."
DEPENDENCE UPON SENIOR MANAGEMENT
The Company is dependent on the efforts, relationships and abilities of its
senior management team. The loss of services of any of these individuals would
have a material adverse effect on the future performance of the Company. The
Company believes that its success is dependent on its ability to attract and
retain additional qualified employees, and the failure to recruit such other
skilled personnel could have a material adverse effect on the Company's
financial condition and results of operations. See "Management" and
"Description of Business--Employees."
17
GOVERNMENT REGULATION OF THE RESTAURANT INDUSTRY
The restaurant industry is subject to extensive laws and regulations
relating to the development and operation of restaurants, including zoning,
the preparation and sale of food and employer/employee relationships. Any
substantial increases in the minimum wage or mandatory health care coverage
could adversely affect the Company's financial condition and results of
operations. Violations of zoning or building codes or regulations could delay
new restaurant openings or the acquisition of existing restaurants. See
"Description of Business--Government Regulation."
FACTORS AFFECTING OPERATIONS
A number of factors beyond the control of the Company may affect sales and
profitability of the Company, including, among other things, the strength of
regional economies where the Company operates, weather, gas prices, and public
health concerns regarding certain foods served at QSRs. Severe weather
conditions in some of the Company's principal markets may have a negative
impact on customer traffic, sales and restaurant contribution. An economic
downturn in any of the Company's regional markets may also have a similar
effect. The Company, as is true with all food establishments, may be adversely
affected by the receipt of tainted products from suppliers or the mishandling
of food on its premises.
MINIMUM WAGE INCREASE
Effective September 1, 1997, the minimum wage increased from $4.75 to $5.15.
Approximately 37.0% of the Company's employees are paid the minimum wage. As a
result, the Company's annual wage cost will increase by approximately $2.4
million per annum. The Company has been anticipating this event, and intends
to try to offset these wage cost increases by pricing increases and cost
reductions through 1997 and 1998. However, there can be no assurance that the
Company's contemplated efforts to offset the expected wage cost increase will
be implemented or, if implemented, that such efforts will be successful.
ENVIRONMENTAL MATTERS
Eight currently owned or leased and one formerly owned property are known or
suspected to have been used by prior owners or operators as retail gas
stations, and a few of these properties may have been used for other
environmentally sensitive purposes. These properties previously contained
underground storage tanks ("USTs"), all of which have been removed. While the
Company is currently not subject to any administrative or court order
requiring remediation of any of its properties, monitoring activities are
being conducted at some properties by former or current owners. In addition,
13 properties owned or leased by Krystal are located adjacent to properties at
which there have been releases of petroleum from underground storage tanks.
Investigation and/or remediation has been undertaken in response to each of
these releases by the owners or operators of these adjacent properties.
Krystal Aviation Co., a wholly-owned subsidiary of the Company, operates
facilities at Lovell Field, the Chattanooga, Tennessee airport. Operations
include the storage and dispensing of fuel and the storage of waste oils in
underground and above ground tanks, as well as the storage and use of small
amounts of cleaning solvents. A portion of one of the facilities is leased to
a firm that performs service on avionics equipment and minor aircraft
maintenance. As a result of the storage and use of petroleum products and
solvents typically associated with repair facilities and fuel dispensing
stations, petroleum products have been released and other contaminants may
have been released at these properties into the soil or groundwater.
Remediation has been conducted at these facilities in response to these
releases, and the applicable authorities are not requiring that Krystal
Aviation Co. or its predecessors conduct further remediation at this time.
Under applicable Federal and state environmental laws, the Company and/or
Krystal Aviation Co., as the current or former owner or operator of their
respective sites, could be liable for the costs of further investigation and
remediation. Further, there can be no assurance that the Company and/or
Krystal Aviation Co. will not be subject to environmental remediation
liability for other environmental conditions at its properties.
FRAUDULENT CONVEYANCE RISKS
Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court to subordinate or avoid the
obligation of, or liens securing, the Notes or any Guarantee in favor of,
other existing or future creditors of the Company or a Guarantor.
18
Under applicable provisions of Federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the
Company or any Guarantor, at the time it incurred the indebtedness evidenced
by the Notes or a Guarantee, (i)(a) was or is insolvent or rendered insolvent
by reason of such occurrence or (b) was or is engaged in a business or
transaction for which the assets remaining with the Company or such Guarantor
constituted unreasonably small capital or (c) intended or intends to incur, or
believed or believes that it would incur, debts beyond its ability to pay such
debts as they mature, and (ii) the Company or such Guarantor received or
receives less than reasonably equivalent value or fair consideration for the
incurrence of the indebtedness, evidenced by the Notes or a Guarantee, and any
pledge or other security interest securing such indebtedness, could be voided,
or claims in respect of the Notes, the Guarantees or the other security
interest securing such indebtedness, could be voided, or claims in respect of
the Notes or the Guarantees could be subordinated to all other debts of the
Company or such Guarantor, as the case may be. The voiding or subordination of
any of such pledges or other security interests or of any of such indebtedness
could result in acceleration thereof. In addition, the payment of interest and
principal by the Company pursuant to the Notes or the payment of amounts by a
Guarantor pursuant to a Guarantee could be voided and required to be returned
to the person making such payment, or to a fund for the benefit of the
creditors of the Company or such Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, were
greater than the fair saleable value of all of its assets at a fair valuation
or if the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature and (ii)
it could not pay its debts as they become due.
On the basis of the historical financial information and recent operating
history of the Company and each Guarantor as discussed in "Selected Historical
Consolidated Financial Information" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and other factors, the
Company and each Guarantor believe that the indebtedness incurred in
connection with the Notes and the Note Guarantees was incurred for proper
purposes and in good faith and that, after giving effect thereto, the Company,
Krystal Aviation Co. and Krystal Aviation Management Co. are solvent and will
continue to be solvent after issuing the Notes or its Guarantee, as the case
may be, will have sufficient capital for carrying on its business after such
issuance and will be able to pay its debts as they mature. There can be no
assurance, however, as to what standard a court would apply in making such
determinations. In addition, the Company did not obtain a solvency opinion in
connection with the Financing.
PURCHASE OF NOTES UPON CHANGE OF CONTROL
Upon a Change of Control, the Company may be required to offer to purchase
all outstanding Notes at 101% of the principal amount thereof plus accrued and
unpaid interest to the date of purchase. The source of funds for any such
purchase would be the Company's available cash or cash generated from other
sources. However, there can be no assurance that sufficient funds would be
available at the time of any Change of Control to make any required purchases
of Notes tendered or, if applicable, that restrictions in the Credit Facility
would permit the Company to make such required purchases. See "Description of
the Notes--Repurchase at the Option of Holders."
LACK OF A PUBLIC MARKET FOR THE NOTES
The Private Notes have been designated eligible for trading by qualified
institutional investors in the PORTAL market by Qualified Institutional
Buyers. The Company does not intend to apply for listing of the Exchange Notes
on any securities exchange or to seek approval for trading through any
automated quotation system. Future trading prices of the Exchange Notes will
depend on many factors, including prevailing interest rates, the Company's
operating results and the market for similar securities. The Initial Purchaser
has advised the Company that it currently intends to make a market in the
Exchange Notes. However, the Initial Purchaser is not obligated to do so, and
any market making may be discontinued at any time without notice. No assurance
19
can be given as to the liquidity of the trading market for the Exchange Notes
or that an active public market for the Exchange Notes will develop or, if
developed, will continue. If an active public market does not develop or is
not maintained, the market price and liquidity of the Exchange Notes may be
adversely affected. See "The Exchange Offer -- Resale of the Exchange Notes"
CONSEQUENCES OF FAILURE TO EXCHANGE
As a consequence of the offer or sale of the Private Notes pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and applicable state securities laws,
holders of Private Notes who do not exchange their Private Notes for Exchange
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Private Notes as set forth in the legend
thereon. In general, Private Notes may not be offered or sold unless
registered under the Securities Act, except pursuant to an exemption from, or
in a transaction not subject to, the Securities Act and applicable state
securities laws. The Company does not currently anticipate that it will
register the Private Notes under the Securities Act.
Upon consummation of the Exchange Offer, due to the restrictions on transfer
of the Private Notes and the absence of such restrictions applicable to the
Exchange Notes, it is likely that the market, if any, for the Private Notes
will be relatively less liquid than the market for Exchange Notes.
Consequently, holders of Private Notes who do not participate in the Exchange
Offer could experience significant diminution in the value of their Private
Notes, compared to the value of the Exchange Notes.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer is being made by the Company and the Guarantors to
satisfy certain obligations of the Company under the Registration Rights
Agreement. Pursuant to the Registration Rights Agreement, the Company agreed,
for the benefit of the Holders of the Notes, at the Company's expense, to (i)
file within 60 days after the date of original issuance of the Notes a
registration statement (the "Exchange Offer Registration Statement") with the
Commission with respect to a registered offer to exchange the Private Notes
for the Exchange Notes to be issued under the Indenture or a substantially
similar indenture in the same aggregate principal amount as and with terms
that will be identical in all respects to the Private Notes (except that the
Additional Interest provisions and transfer restrictions will be modified or
eliminated, as appropriate), (ii) use its best efforts to cause the Exchange
Offer Registration Statement to be declared effective under the Securities Act
within 150 days after the date of original issuance of the Private Notes, and
(iii) use its best efforts to consummate the Exchange Offer within 180 days
after the date of original issuance of the Private Notes. Promptly after the
Exchange Offer Registration Statement has been declared effective, the Company
will offer the Exchange Notes in exchange for surrender of the Private Notes.
The Company will keep the Exchange Offer open for not less than 30 days and
not more than 45 days (or longer if required by the applicable law) after the
date notice of the Exchange Offer is mailed to the Holders of the Private
Notes. For each Private Note tendered to the Company pursuant to the Exchange
Offer and not validly withdrawn by the Holder thereof, the Holder of such
Private Note will receive an Exchange Note having a principal amount equal to
the principal amount of such surrendered Private Note.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date.
The Company will issue Exchange Notes in exchange for an equal aggregate
principal amount at maturity of outstanding Private Notes validly tendered
pursuant to the Exchange Offer and not withdrawn prior to the Expiration Date.
Private Notes may be tendered only in integral multiples of $1,000.
20
The form and terms of the Exchange Notes are identical in all material
respects to the form and terms of the Private Notes except that the Exchange
Notes will be registered under the Securities Act and, therefore, will not
bear 1egends restricting the transfer thereof. The Exchange Notes will
evidence the same indebtedness as the Private Notes (which they replace) and
will be issued under and entitled to the benefits of the Indenture, which also
authorized the issuance of the Private Notes, such that the Notes will be
treated as a single class of debt securities under the Indenture.
The Exchange Offer is not being conditioned upon any minimum aggregate
principal amount of Private Notes being tendered for exchange.
As of the date of this Prospectus, $100 million in aggregate principal
amount of the Private Notes are outstanding. Only a registered holder of the
Private Notes (or such holder's legal representative or attorney-in-fact), as
reflected on the records of the Trustee under the Indenture may participate in
the Exchange Offer. Solely for reasons of administration, the Company has
fixed the close of business on December 11, 1997 as the record date for the
Exchange Offer for purposes of determining the persons to whom this Prospectus
and the Letter of Transmittal will be mailed initially. There will be no fixed
record date for determining registered holders of the Private Notes entitled
to participate in the Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenter's rights
under the Tennessee Business Corporation Act or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the provisions of the Registration Rights Agreement and the
applicable requirements of the Securities Act and the rules and regulations of
the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, and if, the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Private Notes for the purposes of receiving the Exchange Notes from the
Company. The Company expressly reserves the right to amend or terminate the
Exchange Offer, and not to accept for exchange any Private Notes not
theretofore accepted for exchange, upon the occurrence of any of the
conditions specified below under "--Conditions."
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
January 23, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and mail to the registered
holders of the Private Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if, in
the opinion of counsel for the Company, the consummation of the Exchange Offer
would violate any applicable law, rule or regulation or any applicable
interpretation of the staff of the Commission, to terminate or amend the
Exchange Offer by giving oral or written notice of such delay, extension
termination or amendment to the Exchange Agent. Any such delay in acceptance
extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered holders. If
the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, the Company will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered holders, and the Company will extend the Exchange Offer for a
period of five to ten business days, depending upon the significance of the
amendment and the manner of disclosure to the registered holders, if the
Exchange Offer would otherwise expire during such five to ten business day
period.
21
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
RESALE OF THE EXCHANGE NOTES
Based upon interpretations by the staff of the Commission set forth in
certain no-action letters issued to third parties, the Company believes that
the Exchange Notes issued pursuant to the Exchange Offer in exchange for the
Private Notes may be offered for resale, resold and otherwise transferred by a
holder thereof (other than (i) a broker-dealer who purchased such Private
Notes directly from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act, or (ii) a person that is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
requirements of the Securities Act; provided that the holder is acquiring
Exchange Notes in the ordinary course of its business and is not
participating, does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of the
Exchange Notes. Holders of Private Notes wishing to accept the Exchange Offer
must represent to the Company that such conditions have been met. Each broker-
dealer that receives Exchange Notes for its own account in exchange for
Private Notes, where such Private Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of any Exchange Notes received in exchange
for Private Notes acquired by such broker-dealer as a result of market-making
or other trading activities. Pursuant to the Registration Rights Agreement,
the Company has agreed to make this Prospectus, as it may be amended or
supplemented from time to time, available to any such broker-dealer that
requests copies of such Prospectus in the Letter of Transmittal for use in
connection with any such resale for a period not to exceed one year after the
closing of the Exchange Offer. See "Plan of Distribution."
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 10 1/4% per annum.
Interest on the Exchange Notes will be payable semi-annually commencing April
1, 1998. Holders of Exchange Notes will receive interest on April 1, 1998 from
the date of initial issuance of the Exchange Notes, plus an amount equal to
the accrued interest on the Private Notes from the last interest payment date
on which interest was paid on the Private Notes, or if no interest has been
paid on the Private Notes, from the date of original issuance of the Private
Notes to but not including the date of exchange thereof. Holders of Private
Notes that are accepted for exchange will be deemed to have waived the right
to receive any interest accrued on the Private Notes.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange any Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of any Private Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the Company's sole judgment, might materially impair the ability
of the Company to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or enacted,
or any existing law, statute, rule or regulation is interpreted by the
staff of the Commission, which, in the Company's sole judgment, might
materially impair the ability of the Company to proceed with the Exchange
Offer; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby.
22
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Private Notes, by giving oral or
written notice of such extension to the holders thereof. During any such
extensions, all Private Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Private
Notes not accepted for exchange for any reason will be returned without
expense to the tendering holder thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Private Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified above. The Company will give oral or written notice
of any extension, amendment, non-acceptance or termination to the holders of
the Private Notes as promptly as practicable, such notice in the case of any
extension to be issued no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its reasonable judgment. The failure by the Company
at any time to exercise any of the foregoing rights shall not be deemed a
waiver of any such right and each such right shall be deemed an ongoing right
which may be asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Private Notes
tendered, and no Exchange Notes will be issued in exchange for any such
Private Notes, if at such time any stop order shall be threatened or in effect
with respect to the Registration Statement of which this Prospectus
constitutes a part or the qualification of the Indenture under the Trust
Indenture Act of 1939 (the "TIA").
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile
thereof, have the signatures thereon guaranteed if required by the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile to the Exchange Agent at the address set forth below under "--
Exchange Agent" for receipt prior to the Expiration Date. In addition, either
(i) certificates for such Private Notes must be received by the Exchange Agent
along with the Letter of Transmittal, (ii) a timely confirmation of a book-
entry transfer (a "Book-Entry Confirmation") of such Private Notes, if such
procedure is available, into the Exchange Agent's account at The Depository
Trust Company (the "Depository") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date or (iii) the holder must comply with the guaranteed delivery
procedures described below.
The tender by a holder that is not withdrawn prior to the Expiration Date
will constitute an agreement among such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. DO NOT SEND THE LETTER OF TRANSMITTAL OR ANY
PRIVATE NOTES TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS,
DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE
TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner of the Private Notes whose Private Notes are registered
in the name of a broker, dealer, commercial bank, trust company or other
nominee and who wishes to tender should contact the registered holder promptly
and instruct such registered holder to tender on such beneficial owner's
behalf. If such beneficial
23
owner wishes to tender on such owner's behalf, such owner must, prior to
completing and executing the Letter of Transmittal and delivering such owner's
Private Notes, either make appropriate arrangements to register ownership of
the Private Notes in such owner's name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may
take considerable time and may not be able to be completed prior to the
Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box titled "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be made by a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible
guarantor institution" (within the meaning of Rule 17Ad-15 under the Exchange
Act) that is a member of one of the recognized signature guarantee programs
identified in the Letter of Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Private Notes listed therein, such Private Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder exactly as such registered holder's name appears on such
Private Notes.
If the Letter of Transmittal or any Private Notes are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must
submitted with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Private Notes not properly tendered or any Private Notes the Company's
acceptance of, would, in the opinion of counsel for the Company, be unlawful.
The Company also reserves the right to waive any defects, irregularities or
conditions of tender as to particular Private Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including
the instructions in the Letter of Transmittal) will be final and binding on
all parties. Unless waived, defects or irregularities in connection with
tenders of Private Notes must be cured within such time as the Company shall
determine. Although the Company intends to notify holders of defects or
irregularities with respect to tenders of Private Notes, neither the Company,
the Exchange Agent nor any other person shall incur any liability for failure
to give such notification. Tenders of Private Notes will not be deemed to have
been made until such defects or irregularities have been cured or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Private Notes that are not tendered pursuant to the
Exchange Offer, the Company reserves the right in its sole discretion to
purchase or make offers for any Private Notes that remain outstanding
subsequent to the Expiration Date and, to the extent permitted by applicable
law, purchase Private Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
By tendering, each holder of Private Notes will represent to the Company
that, among other things, (i) the Exchange Notes to be acquired by such holder
of Private Notes in connection with the Exchange Offer are being acquired by
such holder in the ordinary course of business of such holder, (ii) holder has
no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iii) such holder acknowledges and agrees
that any person who is participating in the Exchange Offer for the purposes of
distributing the Exchange Notes must comply with the registration and
prospectus delivery requirements of the
24
Securities Act in connection with a secondary resale transaction of the
Exchange Notes acquired by such person and cannot rely on the position of the
staff of the Commission set forth in certain no-action letters, (iv) such
holder understands that a secondary resale transaction described in clause
(iii) above and any resales of Exchange Notes obtained by such holder in
exchange for Private Notes acquired by such holder directly from the Company
should be covered by an effective registration statement containing the
selling security holder information required by Item 507 or Item 508, as
applicable, of Regulation S-K of the Commission and (v) such holder is not an
"affiliate," as defined in Rule 405 under the Securities Act, of the Company.
If the holder is a broker-dealer that will receive Exchange Notes for such
holder's own account in exchange for Private Notes that were acquired as a
result of market-making activities or other trading activities such holder
will be required to acknowledge in the Letter of Transmittal that such holder
will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a prospectus, such
holder will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are
withdrawn, such unaccepted, withdrawn or non-exchanged Private Notes will be
returned without expense to the tendering holder thereof (or, in the case of
Private Notes tendered by book-entry transfer into the Exchange Agent's
account at the Depository pursuant to the book-entry transfer procedures
described below, such Private Notes will be credited to an account maintained
with the Depository) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes with the Depository for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's systems may make book-
entry delivery of Private Notes by causing the Depository to transfer such
Private Notes into the Exchange Agent's account at the Depository in
accordance with the Depository's procedures for transfer. However, although
delivery of Private Notes may be effected through book-entry transfer at the
Depository, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth
below under "--Exchange Agent" on or prior to the Expiration Date or pursuant
to guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder and the certificate number(s) of such Private Notes,
stating that the tender is being made thereby and guaranteeing that, within
five business days after the Expiration Date, the Letter of Transmittal (or a
facsimile thereof), together with the certificate(s) representing the Private
Notes in proper form for transfer or a Book-Entry Confirmation, as the case
be, and any other documents required by the Letter of Transmittal, will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof) as
well as the certificate(s) representing all tendered Private Notes in proper
form for transfer and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five business days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to guaranteed
delivery procedures set forth above.
25
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date. To withdraw a tender of
Private Notes in the Exchange Offer, a written or facsimile transmission
notice of withdrawal must be received by the Exchange Agent at its address set
forth herein prior to the Expiration Date. Any such notice of withdrawal must
(i) specify the name of the person having deposited the Private Notes to be
withdrawn, (ii) identify the Private Notes to be withdrawn (including
certificate number or numbers) and (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Private Notes were tendered (including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt
of such notices will be determined by the Company, in its sole discretion,
whose determination shall be final and binding on all parties. Any Private
Notes withdrawn will be deemed not to have been validly tendered for purposes
of Exchange Offer, and no Exchange Notes will be issued with respect thereto
unless the Private Notes so withdrawn are validly retendered. Properly
withdrawn Private Notes may be retendered by following one of the procedures
described above under "The Exchange Offer--Procedures for Tendering" at any
time prior to the Expiration Date.
EXCHANGE AGENT
SunTrust Bank, Atlanta has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
By Mail: By Facsimile Transmission: By Hand:
SunTrust Bank, Atlanta (For Eligible Institutions Only) SunTrust Bank, Atlanta
Corporate Trust Administration (404) 332-3966 Corporate Trust Administration
P.O. Box 105036 58 Edgewood Avenue
Atlanta, Georgia 30348-5036 Confirm by Telephone: 4th Floor Annex
Attention: David M. Kaye (404) 588-8060 Atlanta, Georgia 30303
Attention: David M. Kaye
By Overnight Delivery:
SunTrust Bank, Atlanta
Corporate Trust Administration
58 Edgewood Avenue
4th Floor Annex
Atlanta, Georgia 30303
Attention: David M. Kaye
SunTrust Bank, Atlanta also serves as Trustee under the Indenture.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, facsimile transmission, telephone or in person by
officers and regular employees of the Company and their affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it its reasonable, out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include registration fees, fees and
expenses of the Exchange Agent and the Trustee, accounting and legal fees and
printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to exchange of
Private Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Private Notes pursuant
to the Exchange Offer, then the amount of any such transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the
amount of such transfer taxes will be billed directly to such tendering
holder.
26
CONSEQUENCE OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of Private Notes
are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
Private Notes that are not exchanged for the Exchange Notes pursuant to the
Exchange Offer will remain "restricted securities" within the meaning of Rule
144(a)(3)(iv) of the Securities Act. Accordingly, such Private Notes may not
be offered, sold, pledged or otherwise transferred except (i) to a person whom
the seller reasonably believes is a "qualified institutional buyer" within the
meaning of Rule 144A under the Securities Act purchasing for its own account
or for the account of a qualified institutional buyer in a transaction meeting
the requirements of Rule 144A, (ii) in an offshore transaction complying with
Rule 903 or Rule 904 of Regulation S under the Securities Act, (iii) pursuant
to an exemption from registration under the Securities Act provided by Rule
144 thereunder (if available), (iv) pursuant to an effective registration
statement under the Securities Act or (v) to institutional accredited
investors in a transaction exempt from the registration requirements of the
Securities Act, and, in each case, in accordance with all other applicable
securities laws and the transfer restrictions set forth in the Indenture.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the remaining term of the Notes.
THE ACQUISITION
GENERAL
Pursuant to the Merger Agreement, on September 26, 1997 (effective September
29, 1997 for accounting purposes), Holdings acquired the Company (the
"Acquisition") for an aggregate purchase price equal to $108,403,276. At the
Acquisition Closing, TKC, a wholly-owned subsidiary of Holdings, was merged
with and into the Company (the "Merger") pursuant to the Merger Agreement and
the Company as the surviving corporation retained the name "Krystal." As a
result of the Acquisition and Merger, the Notes became obligations of the
Company as the successor corporation to TKC, and Holdings became the owner of
100% of the common stock of the Company.
FINANCING OF THE ACQUISITION
Holdings and TKC were formed to consummate the Acquisition and Merger. Of
the $35.0 million of Holdings capital stock issued in connection with the
Acquisition, Philip H. Sanford, the Chairman and Chief Executive Officer of
the Company, purchased $5.0 million. Holdings made the Equity Contribution by
contributing such funds to TKC at the Acquisition Closing.
The purchase price for the Acquisition, together with $7.3 million of
related fees and expenses, was funded through the Financing.
The following table sets forth the amounts of sources and uses of funds on a
pro forma basis received by the Company in connection with the Financing:
AMOUNT
(IN
000'S)
--------
Sources:
Cash......................................... $ 5,426
Revolving Credit Facility.................... 12,491
Notes........................................ 100,000
Equity....................................... 35,000
--------
Total Sources............................... $152,917
========
Uses:
Acquisition of Common Stock.................. $108,403
Refinance Existing Debt(1)................... 35,500
Letter of Credit Cash Collateral............. 1,759
Transactions Costs & Fees.................... 7,255
--------
Total Uses.................................. $152,917
========
- --------
(1) The indebtedness that was refinanced bore interest at a weighted average
rate of 9.2% as of September 28, 1997.
27
USE OF PROCEEDS OF THE EXCHANGE NOTES
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the Exchange Notes offered hereby and has
agreed to pay the expenses of the Exchange Offer. In consideration for issuing
the Exchange Notes as contemplated in this Prospectus, the Company will
receive, in exchange, the Private Notes representing an equal aggregate
principal amount. The form and terms of the Exchange Notes are identical in
all material respects to the form and terms of the Private Notes, except as
otherwise described herein under "The Exchange Offer--Terms of the Exchange
Offer." The Private Notes surrendered in exchange for Exchange Notes will be
retired and canceled and cannot be reissued. Accordingly, issuance of the
Exchange Notes will not result in any increase in the outstanding indebtedness
of the Company.
PRO FORMA CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of the
Company as of September 28, 1997, (ii) the adjustments necessary thereto to
give effect to (a) the closing of the offering of the Private Notes and the
application of the net proceeds therefrom and from borrowings under the Credit
Facility and (b) the Acquisition and (iii) the pro forma consolidated
capitalization of the Company following such adjustments. This table should be
read in conjunction with "Use of Proceeds," "Selected Historical Consolidated
Financial Information" and "Unaudited Pro Forma Financial Information,"
included elsewhere in this Prospectus.
SEPTEMBER 28, 1997
-------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(IN THOUSANDS)
Current portion of long-term debt and capital
lease obligations............................. $ 2,323 $(2,000) $ 323
-------- ------- --------
Long-term debt and capital lease obligations:
Credit Facility (1)........................... -- 12,491 12,491
Capital lease obligations and other long-term
debt......................................... 36,650 (33,500) 3,150
Senior Notes.................................. -- 100,000 100,000
-------- ------- --------
Total long-term debt and capital lease obli-
gations..................................... 36,650 78,991 115,641
-------- ------- --------
Shareholders' equity
Common stock.................................. 40,363 (5,363) 35,000
Retained earnings............................. 7,318 (7,318) --
Deferred compensation......................... (1,402) 1,402 --
-------- ------- --------
Total shareholders' equity................... 46,279 (11,279) 35,000
-------- ------- --------
Total capitalization....................... $ 85,252 $65,712 $150,964
======== ======= ========
- --------
(1) Reflects borrowings under the Credit Facility necessary to consummate the
Financing and the Acquisition. The total availability under the Credit
Facility is $25.0 million. See "Unaudited Pro Forma Financial Information"
and "Description of Credit Facility."
28
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial statements (the
"Pro Forma Financial Statements") include the unaudited pro forma condensed
consolidated balance sheet as of September 28, 1997 (the "Pro Forma Balance
Sheet"), and the unaudited pro forma condensed consolidated statements of
operations for the fiscal year ended December 29, 1996, the nine months ended
September 28, 1997, and the nine months ended September 29, 1996 (the "Pro
Forma Statements of Operations").
The Pro Forma Statements of Operations give effect to the Financing and the
Acquisition and the cost reduction items described in the following paragraph
as if they had been consummated on January 1, 1996. The Pro Forma Balance
Sheet gives effect to the Transactions as if they were consummated on
September 28, 1997.
Management will initiate a cost reduction plan after the close of the
transaction to reduce costs by over $4.7 million in 1997 and 1998 as compared
with fiscal 1996 levels. See "Summary--Business Strategy."
The Acquisition will be accounted for using the purchase method of
accounting. The aggregate purchase price for the Acquisition will be allocated
to the tangible and intangible assets and liabilities acquired based upon
their respective fair values. The allocation of the aggregate purchase price
reflected in the Pro Forma Financial Statements is preliminary. The final
allocation of the purchase price is contingent upon studies and valuations
that have not yet been completed.
The Pro Forma Financial Statements are based on the historical financial
statements of the Company and the assumptions and adjustments described in the
accompanying notes. The Pro Forma Financial Statements do not purport to
represent what the Company's results of operations or financial position
actually would have been had the Financing and the Acquisition and the cost
reduction items described herein in fact been consummated on the dates
indicated or to project the results of operations or financial position for
any future period or date. The Pro Forma Financial Statements are based upon
assumptions that management believes are reasonable and should be read in
conjunction with the consolidated financial statements and the notes thereto
of the Company included elsewhere in this Prospectus.
29
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 28, 1997
(IN THOUSANDS)
OFFERING ACQUISITION
HISTORICAL(A) ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ----------- ----------- ---------
Cash...................... $ 5,926 $(5,426)(c) $ 500
142,446 (b) $(142,446)(c)
Accounts receivable....... 4,012 -- 4,012
Inventories............... 1,890 177 (d) 2,067
Other current assets...... 8,748 1,759 (c) 2,599 (d) 13,106
-------- --------
Current Assets........... 20,576 19,685
Property, Building &
Equipment, net........... 90,034 21,639 (d) 111,673
Other Assets.............. 8,520 7,255 (e) 8,414 (f) 24,189
Intangibles............... -- 40,877 (d) 40,877
-------- --------
Total Assets............. 119,130 196,424
======== ========
Accounts Payable &
Accruals................. 23,013 3,200 (d) 26,213
Current Maturities of Debt
& Leases................. 2,323 (2,000)(c) 323
-------- --------
Current Liabilities...... 25,336 26,536
Revolver.................. -- 12,491 (b) 12,491
Long Term Debt & Leases... 36,650 (33,500)(c) 3,150
Senior Notes.............. -- 100,000 (b) 100,000
Other Liabilities......... 10,865 8,382 (h) 19,247
-------- --------
Total Liabilities........ 72,851 161,424
Common Stock.............. 40,363 35,000 (b) (40,363)(g) 35,000
Retained Earnings......... 7,318 (7,318)(g) --
Deferred Compensation..... (1,402) 1,402 (g)
-------- --------
Shareholders' Equity..... 46,279 35,000
-------- --------
Total Liabilities &
Shareholders' Equity.... $119,130 $196,424
======== ========
See accompanying notes.
30
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The Pro Forma Condensed Consolidated Balance Sheet reflects the Financing
and the Acquisition as if they had occurred as of September 28, 1997 (actual
amounts may differ from amounts estimated below).
(a) Certain historical balances for the Company have been reclassified or
condensed for purposes of this pro forma presentation.
(b) Reflects the issuance of the Notes, the Equity Contribution and the
Financing:
Issuance of the Notes........................................... $100,000
Equity Financing................................................ 35,000
Senior Credit Facility:
Current portion................................................ --
Long-term portion.............................................. 12,491
Less: issuance-related fees and expenses........................ (5,045)
--------
$142,446
========
(c) Represents the following cash payments related to the Acquisition:
Purchase price................................................ $(108,403)
Retirement of pre-acquisition debt............................ (35,500)
Letter of credit cash collateral.............................. (1,759)
Acquisition expenses.......................................... (2,210)
Less: use of excess cash on hand.............................. 5,426
---------
$(142,446)
=========
(d) Reflects the preliminary allocation of the purchase price of the
Acquisition. The Acquisition will be accounted for using the purchase method
of accounting. The Company has not yet determined the final allocation of
the purchase price and, accordingly, the amounts shown below will differ
from the amounts ultimately determined.
The preliminary pro forma allocation of the purchase price is as follows:
Purchase price for the Company common stock..................... $108,403
Less:
Elimination of the Company stockholders' equity................ 46,279
--------
Excess of purchase price over historical amounts to be
allocated..................................................... $ 62,124
========
Allocation of excess of purchase price based on preliminary estimated
values:
Property, Building & Equipment (based on preliminary
appraisal, subject to adjustment based on final appraisal)... $ 21,639
Inventories (elimination of LIFO reserve) .................... 177
Other Current Assets (net benefit for income taxes as a result
of a net operating loss carryback from short year return).... 2,599
Other Assets (pension plan adjustment for plan assets at fair
value in excess of projected benefit obligation--net of
write-off of deferred loan costs)............................ 8,414
Goodwill (subject to final adjustment as a result of asset
appraisal)................................................... 40,877
Other Liabilities (elimination of pension plan accrual and
increase in deferred compensation plan--net of tax
adjustment).................................................. (8,382)
Accruals for employee severance and restructuring costs....... (3,200)
--------
$ 62,124
========
31
(e) Reflects the following:
Issuance-related fees and expenses.............................. $ 5,045
Acquisition expenses............................................ 2,210
-------
$ 7,255
=======
(f) Reflects the following:
Adjustment of defined benefit pension plan for excess of plan
assets at fair value over the projected benefit obligation..... $ 9,725
Elimination of existing deferred loan costs related to
extinguishment of debt ........................................ (1,311)
-------
$ 8,414
=======
(g) Reflects the elimination of historical equity balances.
(h) Reflects the following:
Elimination of unfunded pension benefit obligations............. $ 4,007
Adjustment of deferred tax...................................... (12,039)
Adjustment of deferred compensation plan to unfunded projected
benefit level.................................................. (350)
-------
$(8,382)
=======
32
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 29, 1996
(DOLLARS IN THOUSANDS)
COST
OFFERING ACQUISITION SAVINGS SUPPLEMENTAL
HISTORICAL(A) ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
------------- ----------- ----------- --------- ----------- ------------
STATEMENT OF OPERATIONS
DATA:
Revenues:
Restaurant sales....... $236,470 $236,470 $236,470
Franchise fees......... 349 349 349
Royalties.............. 2,778 2,778 2,778
Other revenue.......... 4,671 4,671 4,671
-------- -------- --------
Total revenues....... 244,268 244,268 244,268
Cost of restaurant
sales.................. 195,733 195,733 $ (637)(b) 195,096
Depreciation and
amortization........... 11,378 $2,636 (c) 14,014 14,014
General and
administrative expense. 25,422 25,422 (4,123)(b) 21,299
Other operating expense. 3,809 3,809 3,809
Special charges and
provision for loss on
restaurant closings and
property write downs... 4,000 4,000 4,000
-------- -------- --------
Operating income........ 3,926 1,290 6,050
Interest expense........ 4,796 $ 7,219 12,015 (d) 12,015
Interest income......... (814) 195 (e) (619) (619)
Reorganization expense.. 3,846 3,846 3,846
-------- -------- --------
Loss before income taxes
and extraordinary item. (3,902) (13,952) (9,192)
Income tax provision
(benefit).............. (1,480) (2,817)(f) (380)(f) (4,677) 1,809 (f) (2,868)
-------- -------- --------
Loss before
extraordinary item..... $ (2,422) $ (9,275) $ (6,324)
======== ======== ========
OTHER FINANCIAL DATA:
EBITDA.................. $ 19,304 $ 24,064
EBITDA margin........... 7.9% 9.9%
EBITDA/Interest expense. 4.0 2.0
EBITDA/Cash interest
expense ............... 4.0 2.1
See accompanying notes.
33
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 28, 1997
(DOLLARS IN THOUSANDS)
COST
OFFERING ACQUISITION SAVINGS SUPPLEMENTAL
HISTORICAL(A) ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
------------- ----------- ----------- --------- ----------- ------------
STATEMENT OF OPERATIONS
DATA:
Revenues:
Restaurant sales....... $178,815 $178,815 $178,815
Franchise fees......... 219 219 219
Royalties.............. 2,232 2,232 2,232
Other revenue.......... 3,469 3,469 3,469
-------- -------- --------
Total revenues....... 184,735 184,735 184,735
Cost of restaurant
sales.................. 148,393 148,393 $ (478)(b) 147,915
Depreciation and
amortization........... 8,216 $1,977 (c) 10,193 10,193
General and
administrative expense. 19,656 19,656 (3,092)(b) 16,564
Other operating expense. 2,444 2,444 2,444
Special charges and
provision for loss on
restaurant closings and
property write-downs... -- -- --
-------- -------- --------
Operating income........ 6,026 4,049 7,619
Interest expense........ 2,732 $6,284 9,016 (d) 9,016
Interest income......... (517) 146 (e) (371) (371)
Reorganization expense.. 1,218 1,218 1,218
-------- -------- --------
Income (loss) before
income taxes and
extraordinary item..... 2,593 (5,814) (2,244)
Income tax provision
(benefit).............. 928 (2,443)(f) (285)(f) (1,800) 1,357 (f) (443)
-------- -------- --------
Income (loss) before
extraordinary item..... $ 1,665 $ (4,014) $ (1,801)
======== ======== ========
OTHER FINANCIAL DATA:
EBITDA.................. $ 14,242 $ 17,812
EBITDA margin........... 7.7% 9.6%
EBITDA/Interest expense. 5.2 2.0
EBITDA/Cash interest
expense................ 5.2 2.1
See accompanying notes.
34
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 29, 1996
(DOLLARS IN THOUSANDS)
COST
OFFERING ACQUISITION SAVINGS SUPPLEMENTAL
HISTORICAL(A) ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
------------- ----------- ----------- --------- ----------- ------------
STATEMENT OF OPERATIONS
DATA:
Revenues:
Restaurant sales....... $175,401 $175,401 $175,401
Franchise fees......... 171 171 171
Royalties.............. 2,021 2,021 2,021
Other revenue.......... 3,409 3,409 3,409
-------- -------- --------
Total revenues....... 181,002 181,002 181,002
Cost of restaurant
sales.................. 145,847 145,847 $ (478)(b) 145,369
Depreciation and
amortization........... 8,447 $1,977 (c) 10,424 10,424
General and
administrative expense. 19,567 19,567 (3,092)(b) 16,475
Other operating expense. 2,742 2,742 2,742
Special charges and
provision for loss on
restaurant closings and
property write-downs... -- -- --
-------- -------- --------
Operating income........ 4,399 2,422 5,992
Interest expense........ 3,461 $ 5,552 9,013 (d) 9,013
Interest income......... (820) 146 (e) (674) (674)
Reorganization expense.. 2,288 2,288 2,288
-------- -------- --------
Loss before income taxes
and extraordinary item. (530) (8,205) (4,635)
Income tax provision
(benefit).............. (199) (2,165)(f) (285)(f) (2,649) 1,357 (f) (1,292)
-------- -------- --------
Loss before
extraordinary item..... $ (331) $ (5,556) $ (3,343)
======== ======== ========
OTHER FINANCIAL DATA:
EBITDA.................. $ 12,846 $ 16,416
EBITDA margin........... 7.1% 9.1%
EBITDA/Interest expense. 3.7 1.8
EBITDA/Cash interest
expense................ 3.7 1.9
See accompanying notes.
35
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
The Pro Forma Consolidated Statements of Operations reflect the Financing
and the Acquisition as if they had occurred as of January 1, 1996 (actual
amounts may differ from amounts estimated below).
(a) Certain historical balances of the Company have been reclassified or
condensed for purposes of this pro forma presentation.
YEAR-
ENDED NINE MONTHS- NINE MONTHS-
12/29/96 ENDED 9/28/97 ENDED 9/29/96
-------- ------------- -------------
(b) Reflects the following:
Estimated reduction in costs from
headcount reduction and associated
overhead............................. $ 4,760 $ 3,570 $ 3,570
YEAR-
ENDED NINE MONTHS- NINE MONTHS-
12/29/96 ENDED 9/28/97 ENDED 9/29/96
-------- ------------- -------------
(c) Reflects the following:
Additional amortization of goodwill
and intangibles...................... $ 1,723 $ 1,292 $ 1,292
Additional depreciation on the
increase in property, building and
equipment ........................... $ 913 $ 685 $ 685
------- ------- -------
$ 2,636 $ 1,977 $ 1,977
======= ======= =======
YEAR-
ENDED NINE MONTHS- NINE MONTHS-
12/29/96 ENDED 9/28/97 ENDED 9/29/96
-------- ------------- -------------
(d) Reflects the following:
Interest expense on Credit Facility at
8.4%................................. $ 1,049 $ 787 $ 787
Interest expense on the Notes at
10.25%............................... 10,250 7,688 7,688
Unused commitment fees and agency
fees................................. 63 47 47
Interest expense on mortgages and
loans against cash surrender value of
life insurance at an average rate of
6.4% ................................ 75 60 57
------- ------- -------
Total cash interest expense........... $11,437 $ 8,582 $ 8,579
Amortization of deferred finance
costs................................ 578 434 434
------- ------- -------
Total interest expense................ $12,015 $ 9,016 $ 9,013
======= ======= =======
A change of 1/4% in the interest rate on the Notes and the senior credit
facility would have an impact on pro forma interest expense of $281 and $211
for the year ended December 29, 1996 and the nine month periods ended
September 28, 1997 and September 29, 1996, respectively.
(e) Reflects the decline in interest income resulting from the use of cash on
hand in the acquisition.
(f) Reflects the net additional income tax expense (benefit) as a result of
the Transaction, at the effective rates of 38% for the year ended December
29, 1996 and the nine months ended September 28, 1997 and September 29,
1996.
36
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected financial data is qualified in its entirety by the
consolidated financial statements of the Company and other information
contained elsewhere in this Prospectus. The financial data as of January 3,
1993, January 2, 1994, January 1, 1995, December 31, 1995, and December 29,
1996, and for the years then ended, has been derived from the audited
financial statements of the Company contained elsewhere in this Prospectus.
The financial data as of and for the nine months ended September 29, 1996 and
September 28, 1997 have been derived from the unaudited financial statements
of the Company and, in the opinion of the Company's management, include all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation. Interim results are not necessarily
indicative of financial results of the Company for the full fiscal year. The
following financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Consolidated Financial Statements and notes thereto appearing elsewhere in
this Prospectus.
YEAR ENDED(1) NINE MONTHS ENDED
---------------------------------------------------------- ---------------------------
JANUARY 3, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1993 1994 1995 1995 1996 1996 1997
---------- ---------- ---------- ------------ ------------ ------------- -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Restaurant sales........ $226,302 $228,468 $239,104 $239,376 $236,470 $175,401 $178,815
Franchise fees.......... 487 533 796 618 349 171 219
Royalties............... 774 1,157 1,880 2,420 2,778 2,021 2,232
Other revenue........... 4,562 6,575 6,542 5,614 4,671 3,409 3,469
-------- -------- -------- -------- -------- -------- --------
Total revenues.......... 232,125 236,733 248,322 248,028 244,268 181,002 184,735
Cost of restaurant
sales.................. 178,543 182,530 192,256 197,031 195,733 145,847 148,393
Depreciation &
amortization expense... 8,823 9,881 11,213 12,311 11,378 8,447 8,216
General & administrative
expense................ 25,166 24,781 25,775 25,770 25,422 19,567 19,656
Other operating
expenses, net.......... 4,111 5,651 4,946 4,417 3,809 2,742 2,444
Provision for loss on
restaurant closings and
other property write-
downs.................. -- -- -- 3,911 -- -- --
Special charges......... -- -- 2,000 10,000 4,000 -- --
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses............... 216,643 222,843 236,190 253,440 240,342 176,603 178,709
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations............. 15,482 13,890 12,132 (5,412) 3,926 4,399 6,026
Reorganization item..... -- -- -- 184 3,846 2,288 1,218
Interest expense........ 5,177 3,494 3801 4,134 4,796 3,461 2,732
Interest income......... (1,092) (842) (820) (718) (814) (820) (517)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
provision for (benefit
from) income taxes and
extraordinary items.... 11,397 11,238 9,151 (9,012) (3,902) (530) 2,593
Provision for (benefit
from) income taxes..... 4,391 3,772 2,962 (3,688) (1,480) (199) 928
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
cumulative effect of
change in accounting
principle and
extraordinary item..... 7,006 7,466 6,189 (5,324) (2,422) (331) 1,665
Cumulative effect of
accounting principle
change
Post-retirement health
benefits, net of
income tax benefit of
$178,000.............. -- (290) -- -- -- -- --
Income Taxes........... -- 413 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) before
extraordinary item..... 7,006 7,589 6,189 (5,324) (2,422) (331) 1,665
Extraordinary loss on
early extinguishment of
debt, net of tax
benefit of $134,000 in
1997................... -- -- -- -- -- -- 220
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 7,006 $ 7,589 $ 6,189 $ (5,324) $ (2,422) $ (331) $ 1,445
======== ======== ======== ======== ======== ======== ========
37
YEAR ENDED(1) NINE MONTHS ENDED
---------------------------------------------------------- ---------------------------
JANUARY 3, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1993 1994 1995 1995 1996 1996 1997
---------- ---------- ---------- ------------ ------------ ------------- -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
---------------------------------------------------------- ---------------------------
OTHER FINANCIAL DATA:
EBITDA(2)............... $24,305 $ 23,771 $ 25,345 $ 20,810 $ 19,304 $ 12,846 $ 14,242
EBITDA margin(3)........ 10.5% 10.0% 10.2% 8.4% 7.9% 7.1% 7.7%
Capital expenditures(4):
Maintenance capital ex-
penditures............ 4,826 6,209 5,814 5,941 5,290 3,355 4,125
Renovation............. 2,366 2,027 1,943 2,461 603 368 447
New restaurant develop-
ment.................. 2,083 17,068 17,697 3,806 -- -- --
Other.................. 758 827 1,199 4,099 564 426 935
------- -------- -------- -------- -------- -------- --------
Total capital
expenditures......... $10,033 $ 26,131 $ 26,653 $ 16,307 $ 6,457 $ 4,149 $ 5,507
BALANCE SHEET DATA (AT
END OF PERIOD):
Net book value of prop-
erty and equipment(5).. $66,974 $ 85,761 $100,888 $100,409 $ 92,826 $ 94,497 $ 90,034
Total assets............ 98,657 105,972 130,786 132,695 143,870 137,886 119,130
Total debt and capital
lease obligations(6)... 35,653 32,546 47,584 43,460 42,789 42,907 38,973
Total shareholder's eq-
uity................... 36,642 44,728 51,636 46,647 44,688 46,588 46,279
- --------
(1) The Company has a 52/53-week fiscal year ending on the last Sunday in
December which normally consists of 13 four-week periods. The fiscal year
ended December 29, 1996 included 52 weeks of operations.
(2) EBITDA represents income from operations plus depreciation and
amortization, adjusted for non-cash items related to gain/losses on asset
dispositions and write-downs. EBITDA should not be construed as a
substitute for income from operations or a better indicator of liquidity
than cash flow from operating activities, which is determined in
accordance with generally accepted accounting principles. EBITDA is
included herein to provide additional information with respect to the
ability of the Company to meet its future debt service, capital
expenditure and working capital requirements in addition, management
believes that certain investors may find EBITDA to be a useful tool for
measuring the ability of the Company to service its debt. EBITDA is not
necessarily a measure of the Company's ability to fund its cash needs. See
the Consolidated Statements of Cash Flows of the Company and the related
notes to the Consolidated Financial Statements thereto included elsewhere
in this Offering Memorandum.
(3) EBITDA margin represents EBITDA divided by total revenues.
(4) Capital expenditures (excluding expenditures funded through capital
leases) have been segregated into the following categories to provide
additional information:
Maintenance capital expenditures represents day-to-day expenditures to
restaurant equipment replacements and general restaurant capital
improvements.
Renovation represents significant restaurant renovations and upgrades
pursuant to the Company's renovation activities with respect to Company
operated restaurants.
New restaurant development represents new company-operated restaurant
construction and development.
Other represents capital expenditures at various corporate offices and new
restaurant equipment such as fryers and security systems.
(5) Net book value of property and equipment includes leased properties (under
capital leases).
(6) For the periods ended December 31, 1995, September 29, 1996 and December
29, 1996, unsecured senior notes totaling $36 million are reflected on the
Company's balance sheets as part of "Liabilities subject to compromise."
For purposes of this table, the senior notes are included in "Total debt
and capital lease obligations."
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Company's revenues are derived primarily from sales by Company-owned
restaurants. Total Company-owned restaurants decreased from 256 at the end of
1995 to 249 at September 28, 1997. Royalties and franchise fees from
franchisees have been a small portion of the Company's revenues to date, but
those sources of revenues are anticipated to increase significantly in future
years as the Company continues to develop its franchised restaurants. The
total number of franchised restaurants grew from 80 to 89 in 1996,
representing an increase of 11.0%. During the first nine months of 1997, the
number of franchised restaurants grew from 89 to 95 (net of one closing),
representing an increase of 6.7%. The Company expects its franchisees to
develop nine new restaurants during the remainder of 1997. The Company
operates a fixed base airport hangar operation in Chattanooga, Tennessee,
although revenues from this operation in each of the last three years were
less than 3.0% of the Company's total revenues.
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 January 1, 1995, December 31, 1995 and December 29, 1996 were 52
week fiscal years.
Cost of restaurant sales relates to food and paper costs, labor and all
other restaurant costs for company-owned restaurants. Other expenses, such as
depreciation and amortization and general and administrative expenses, relate
primarily to company-owned restaurants and to the Company's franchise sales
and support functions.
BANKRUPTCY FILING
In July 1994, the Company was named a defendant in a suit filed in the
United States District Court for the Middle District of Tennessee, in which 41
plaintiffs, who were current and former employees of the Company, alleged
violations of the Fair Labor Standards Act of 1938 ("FLSA") and sought back
wages, liquidated damages, costs and attorneys' fees. The suit alleged that
the plaintiffs were uncompensated for time which they worked on the Company's
behalf. In February 1995, ten additional plaintiffs, also current and former
employees of the Company, filed a separate suit in the same Court containing
essentially the same allegations. As a result, the Company established a
reserve of $2 million to cover the claims of the plaintiffs in the two suits,
the costs associated therewith, and the claims of any other employees and the
costs associated therewith. Since the February 1995 action was originally
filed, approximately 300 additional plaintiffs joined that suit.
On April 18, 1995, the Company settled the July 1994 case by agreeing to pay
$840,000 to the plaintiffs and their counsel. By order dated August 28, 1995,
the Court in the February 1995 case provisionally granted the plaintiffs'
motion for court-supervised notice of the pendency of that action to
prospective class members from among current and former employees of the
Company for the past three years.
In the third quarter of 1995, a total of 17 additional current and former
employees of the Company filed three new suits in the United States District
Courts for the Northern District of Georgia, the Northern District of Alabama
and the Middle District of Florida, containing essentially the same
allegations as set forth in the July 1994 and February 1995 suits.
In light of the three new suits filed against the Company during the third
quarter of 1995 and the order entered in the February 1995 suit provisionally
granting the plaintiffs' motion for court-supervised notice of the pendency of
that action, the Company established an additional $10 million reserve to
cover an estimate of the exposure resulting from (i) the claims of the
plaintiffs in the four pending suits, (ii) the potential for additional claims
of other current and former employees, (iii) related claims and (iv) the costs
associated therewith.
39
On December 15, 1995, the Company 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 (the "Bankruptcy Court") for the
purpose of completely and finally resolving the various claims filed against
the Company by current and former employees alleging violations of the FLSA.
The Company was a debtor-in-possession for purposes of the bankruptcy case.
Approximately 8,000 current or former employees filed claims by the June 6,
1996 bar date in unspecified amounts alleging that they worked time for which
they were not compensated.
An agreement, subject to court approval, was reached in January 1997 to
settle the various wage claims for approximately $13 million. In 1996, the
Company added $4 million to the reserve for settlement of the wage claims,
associated payroll taxes, and related expenses, the balance of which was
$13,875,000 at December 29, 1996.
The Company filed a plan of reorganization with the bankruptcy court (the
"Reorganization Plan") which incorporated the terms of the wage claim
settlement and provided for the payment in full of all valid pre-petition
obligations of the Company. The terms and provisions of the Reorganization
Plan were approved by the Bankruptcy Court on April 10, 1997 and became
effective April 23, 1997. The confirmed plan provided for the following:
. term loans of $10.0 million and $20.0 million and a revolving loan of
$23.0 million effective April 23, 1997, and maturing April 23, 2002 (which
were repaid with proceeds from the Financing);
. the payment of senior debt and secured debt totaling approximately $38.6
million along with all past due interest and additional interest at 1.3%
per annum;
. the settlement of approximately 6,000 FLSA claims totaling about $12.6
million with pro se claims settled for approximately $100,000; and
. the payment of holders of approximately $7.6 million of trade claims of
100% of their claims with interest at 8.5% per annum for the period
December 15, 1995-April 23, 1997.
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. The table also sets forth certain restaurant
operating data for the periods indicated.
FISCAL YEAR ENDED NINE MONTHS ENDED
------------------------------------ -------------------------------
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1995 1995 1996 1996 1997
---------- ------------ ------------ ------------- -------------
(UNAUDITED)
Revenues:
Restaurant sales....... 96.3% 96.5% 96.8% 96.9% 96.8%
Franchise fees......... 0.3 0.2 0.2 0.1 0.1
Royalties.............. 0.8 1.0 1.1 1.1 1.2
Other revenue.......... 2.6 2.3 1.9 1.9 1.9
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of restaurant
sales................. 77.4 79.4 80.1 80.6 80.3
Depreciation and amor-
tization.............. 4.5 5.0 4.7 4.7 4.5
General and administra-
tive expenses......... 10.4 10.4 10.4 10.8 10.6
Other expenses, net.... 2.0 1.8 1.6 1.5 1.3
Provision for loss on
restaurant closings
and other property
write-downs........... -- 1.6 -- -- --
Special charge......... 0.8 4.0 1.6 -- --
----- ----- ----- ----- -----
95.1 102.2 98.4 97.6 96.7
Operating income (loss). 4.9 (2.2) 1.6 2.4 3.3
Reorganization expense.. -- (0.1) (1.6) (1.3) (0.7)
Interest expense:
Contractual rate inter-
est................... (1.5) (1.6) (1.6) (1.7) (1.5)
Interest related to
certain pre-petition
liabilities, net...... -- -- (0.3) (0.2) --
Interest income......... 0.3 0.3 0.3 0.5 0.3
----- ----- ----- ----- -----
Income (loss) before
provision for income
taxes.................. 3.7 (3.6) (1.6) (0.3) 1.4
Provision for (benefit
from) income taxes..... 1.2 (1.5) (0.6) (0.1) (0.5)
----- ----- ----- ----- -----
Net income (loss)....... 2.5% (2.1)% (1.0)% (0.2)% 0.9 %
===== ===== ===== ===== =====
40
FISCAL YEAR ENDED NINE MONTHS ENDED
------------------------------------ -------------------------------
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1995 1995 1996 1996 1997
---------- ------------ ------------ ------------- -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
Restaurant Operating Data:
Number of restaurants at
end of period:
Company-owned.......... 252 256 249 250 249
Franchised............. 65 80 89 83 95
Total................. 317 336 338 333 344
Average sales per
Company-owned
restaurant:
FSR................... $987 $956 $956 $707 $733
DDR................... 487 534 521 383 399
Combined.............. 960 939 937 693 718
Average sales increase
(decrease) per company-
owned restaurant vs.
prior year:
FSR................... (1.5)% (3.1)% 0.0% (0.5)% 3.7%
DDR................... 0.2 9.7 (2.4) (3.0) 4.2
Combined.............. (1.2) (2.2) (0.2) (0.7) 3.6
Company-owned same
restaurant sales
(decrease) vs. prior
year:
FSR................... (1.8)% (2.9)% (0.4)% (0.6)% 3.1%
DDR................... (0.6) (5.7) (1.1) (1.7) 4.7
Combined.............. (1.7) (2.9) (0.4) (0.7) 3.1
COMPARISON OF THE NINE MONTHS ENDING SEPTEMBER 28, 1997 TO THE NINE MONTHS
ENDED SEPTEMBER 29, 1996
Total revenues increased 2.1% to $184.7 million for the first nine months of
1997 compared to $181.0 million for the same period of 1996. Restaurant sales
accounted for $3.4 million of this $3.7 million increase. Restaurant sales for
249 units open the first nine months of 1997 and 1996 increased $5.4 million
during the first nine months of 1997 compared to the same period in 1996 but
were partially offset by the closing of seven restaurants at various times
during 1996 whose combined sales were $2.0 million during the same period of
1996. Company-owned average same restaurant sales for the first nine months of
1997 were $721,000 compared to $699,000 for the same period in 1996, an
increase of 3.1%. The Company's management believes the 1997 first nine months
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 the same period in 1996. The Company had
249 restaurants open at the end of the first nine months of 1997 compared to
250 at the end of the first nine months of 1996.
Franchise fees and royalties increased $259,000 to $2.5 million in the first
nine months of 1997 versus the same period in 1996. The franchise system had
95 restaurants open at the end of the first nine months of 1997 compared to 83
open at the end of the same period in 1996. This increase in franchise fees
and royalties is a result of the increase in franchised restaurants.
Other revenue, which comes from the Company's aviation subsidiary, was $3.5
million in the first nine months of 1997 compared to $3.4 million in the same
period of 1996.
The average customer check for Company-owned full size restaurants in the
first nine months of 1997 was $3.78 as compared to $3.55 in the same period of
1996, an increase of 6.5%. The changes in average customer check are due to
product prices increasing approximately 3.7% in the first nine months of 1997
over the same period in 1996, and introducing promotional products and menu
combinations which increased the average customer check. Customer counts per
restaurant day decreased to 691 in the first nine months of 1997 compared to
709 in the same period of 1996, a decrease of 2.5%. The customer count decline
is partly attributable to a new cash register being installed throughout the
system which counts a customer with each sale registered rather than each time
the cash drawer is opened as the prior register system did. Conversion was
completed in 208 restaurants at September 28, 1997, and management believes
this change has reduced reported customer counts by approximately 1.7%, but
produces a more accurate customer count.
41
Cost of restaurant sales increased $2.5 million, approximately 1.8%, to
$149.4 million in the first nine months of 1997, from $145.8 million in the
same period of 1996. Cost of restaurant sales as a percentage of restaurant
sales decreased to 83.0% in the first nine months of 1997 from 83.2% in the
same period of 1996. This decrease is primarily the result of increases in
food and paper costs and labor expenses that the Company was able to pass
through to customers with offsetting product price increases. Total food and
paper costs were $57.7 million in the first nine months of 1997 as compared to
$56.2 million in the same period of 1996. Food and paper costs as a percentage
of restaurant sales increased to 32.3% in the first nine months of 1997 as
compared to 32.0% in the same period of 1996. Direct labor cost increased
$522,000 in the first nine months of 1997, approximately 1.3%, to 22.3% of
restaurant sales in the first nine months of 1997, versus 22.4% in the same
period of 1996. Assistant restaurant manager labor cost increased $494,000,
approximately 6.3%. Assistant restaurant manager labor cost as a percentage of
restaurant sales increased to 4.7% in the first nine months of 1997 from 4.5%
in the same period of 1996. Restaurant manager labor cost increased $90,000,
approximately 1.6%, due to average salary increases for the first nine months
of 1997.
Depreciation and amortization expenses decreased $231,000, approximately
2.7%, to $8.2 million in the first nine months of 1997 as compared to $8.4
million for the same period in 1996. This decrease in the first nine months of
1997 is due to some assets being fully depreciated in late 1996.
General and administrative expenses increased by $89,000, approximately
0.5%, to $19.7 million in the first nine months of 1997 versus $19.6 million
in the same period of 1996. Advertising expense was approximately $7.5 million
in the first nine months of 1997, down from $7.6 million in the same period of
1996. Advertising expense as a percentage of restaurant sales was 4.2% in the
first nine months of 1997 compared to 4.4% in the same period of 1996.
Salaries increased $287,000 approximately 5.0%, to $6.0 million in the first
nine months of 1997 from $5.7 million in the same period of 1996. This
increase in salaries was primarily the result of accruing $226,000 for profit
incentive bonuses in 1997; no accrual was made in 1996 as there was a year-to-
date net loss.
In accordance with Statement of Position 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code, issued by the American
Institute of Certified Public Accountants, the Company is expensing
Reorganization Items as incurred. The total of such professional fees and
expenses during the first nine months of 1997 was $1.2 million as compared to
$2.3 million in the same period of 1996.
A reducing adjustment of $331,000 in interest related to certain pre-
petition liabilities, net, resulted in $96,000 of income during the first nine
months of 1997 compared to expense of $459,000 in the same period of 1996.
Interest income decreased $303,000 for the first nine months of 1997 compared
to the same period in 1996 due to the reduction in cash and temporary
investments from 1996.
Provision for income taxes increased to $928,000 in the first nine months of
1997 as compared to an income tax benefit of $199,000 for the same period in
1996, when the Company recorded a net loss for the period. The effective tax
rate of 36.0% approximates the combined statutory federal and state income tax
rates.
The write-off of unamortized financing costs in conjunction with
extinguishment of debt of $334,000 pre-tax was recorded in the first nine
months of 1997.
COMPARISON OF FISCAL 1996 TO FISCAL 1995
Total revenues decreased 1.5% to $244.3 million in 1996 compared to $248.0
million in 1995. Restaurant sales decreased $2.9 million to $236.5 million in
1996 from 1995. Fiscal 1996 and fiscal 1995 were both 52 week years. Average
sales per company-owned restaurant decreased by 0.2% to $937,000 from $939,000
in 1995. The Company closed seven full size restaurants in 1996. Franchise
fees decreased $269,000 and royalties increased $358,000 in 1996 as the
Company's franchise system grew to 89 restaurants at the end of 1996 from 80
restaurants at the end of 1995. The Company recognizes franchise fees as
revenues upon the opening of a franchised restaurant.
42
Same restaurant sales declined 0.4% in 1996 versus 1995. The principal cause
of this decrease was a 3.9% decrease in average customer count per restaurant
day to 714 in 1996 from 743 in 1995. Product prices increased approximately
2.2% in 1996 over 1995. The average customer check in 1996 was $3.59 for
company-owned FSRs and $3.90 for company-owned DDRs as compared to $3.46 and
$3.80, respectively, in 1995, an increase of approximately 3.8% and 2.6%,
respectively. The Company's management believes that the major national chains
deep discounting and heavy advertising combined with the over-expansion within
the industry have limited the Company's opportunities for increasing market
share. Given the competitive environment, the Company is deferring capital
outlays for new restaurant development and will concentrate on building same
restaurant sales to the levels experienced in the early 1990's.
Cost of restaurant sales decreased $1.3 million, approximately 0.7%, to
$195.7 million in 1996 from $197.0 million in 1995. Cost of restaurant sales
as a percentage of restaurant sales increased to 82.8% in 1996 from 82.3% in
1995. Total food and paper costs increased $1.2 million, approximately 1.5%,
and increased as a percentage of restaurant sales to 32.2% in 1996 as compared
to 31.3% in 1995. Direct labor cost decreased $1.2 million, approximately
2.2%, and decreased as a percent of restaurant sales to 22.3% in 1996 versus
22.5% in 1995, due to the reduction of the number of restaurants open in 1996
and the institution of a program to reduce direct labor staffing and increase
assistant manager staffing to improve training and operations. Assistant
restaurant manager labor cost increased $694,000, approximately 7.0%, and
increased as a percentage of restaurants sales to 4.5% in 1996 compared to
4.1% in 1995 due to the aforementioned program and average salary increases.
Restaurant manager labor cost increased $79,000, approximately 1.1%, due to
average salary increases net of seven restaurant closings during 1996.
Depreciation and amortization expense decreased $933,000, approximately
7.6%, to $11.4 million in 1996 as compared to $12.3 million in 1995. The
decrease in 1996 was primarily due to certain assets being fully depreciated
in late 1995 and during 1996.
General and administrative expenses decreased $348,000, approximately 1.4%,
to $25.4 million in 1996 versus $25.8 million in 1995. Advertising expense
increased $18,000 to $9.9 million in 1996 from $9.8 million in 1995.
Advertising expense as a percentage of restaurant sales was 4.2% in 1996
compared to 4.1% in 1995. Salaries increased $478,000, approximately 6.9%, to
$7.7 million in 1996 from $7.2 million in 1995. The increase in salaries was
primarily the result of normal cost of living increases given to staff
employees and the addition of key management personnel during 1995.
Professional fees, other than professional fees and expenses related to the
Chapter 11 proceedings, decreased $1.1 million, approximately 53.4%, to
$933,000 in 1996 as compared to $2.0 million in 1995.
In December 1995, the Company recorded a provision for loss on restaurant
closings and other property write-downs of $3,911,000 as discussed in Note 4
to Consolidated Financial Statements.
A special charge of $4.0 million was recorded in 1996, in addition to $10.0
million that was recorded in 1995, in connection with the compensation of
hourly employees as discussed in Note 11 to Consolidated Financial Statements.
Professional fees and expenses related to the Chapter 11 proceedings have
increased $3.7 million to $3.8 million in 1996 compared to $184,000 in 1995.
The Company has operated under Chapter 11 all of 1996 versus 16 days in 1995.
Contractual rate interest decreased $129,000 to $4.0 million in 1996
compared to $4.1 million in 1995 due to reductions in principal in 1995 before
the Chapter 11 filing stayed further principal payments.
Interest related to certain pre-petition liabilities is intended to
compensate creditors for the loss of use of funds during the Chapter 11
period. $1,200,000 was recorded for this expense in 1996, net of approximately
$375,000 of interest income from the investment of funds which, except for the
Chapter 11 restrictions, would have paid vendors' accounts.
Benefit from income taxes was $1.5 million in 1996 versus $3.7 million in
1995. The Company's effective income tax rates in 1996 and 1995 were 38.0% and
40.9%, respectively, as compared to the approximate combined statutory federal
and state income tax rates of 38.0%. The increased effective benefit rate for
1995 resulted from utilization of tax credits which were not available for
most of 1996.
43
COMPARISON OF FISCAL 1995 TO FISCAL 1994
Total revenues decreased 0.1% to $248.0 million in 1995 compared to $248.3
million in 1994. Restaurant sales increased $272,000 to $239.4 million in 1995
from 1994. Fiscal 1995 and fiscal 1994 were both fifty-two week years. Average
sales per company-owned restaurant decreased by 2.2% to $939,000 from $960,000
in 1994. The Company opened six new full size restaurants and purchased an FSR
and a DDR from a franchisee and closed four full size restaurants in 1995.
Franchise fees decreased $178,000 and royalties increased $540,000 in 1995 as
the Company's franchise system grew to 80 restaurants at the end of 1995 from
65 restaurants at the end of 1994. The Company recognizes franchise fees as
revenues upon the opening of a franchised restaurant.
Same restaurant sales declined 2.9% in 1995 versus 1994. The principal cause
of this decrease was a decrease in average customer count per restaurant day
to 743 in 1995 from 778 in 1994, a decrease of 4.5%. Product prices increased
approximately 1.0% in 1995 over 1994. The average customer check in 1995 was
$3.46 for company-owned FSRs and $3.80 for company-owned DDRs as compared to
$3.37 and $3.65, respectively, in 1994, an increase of approximately 2.7% and
4.1%, respectively. The Company's management believes that the major national
chains deep discounting and heavy advertising combined with the over-expansion
within the industry have limited the Company's opportunities for increasing
market share.
Cost of restaurant sales increased $4.8 million, approximately 2.5%, to
$197.0 million in 1995 from $192.3 million in 1994. Cost of restaurant sales
as a percentage of restaurant sales increased to 82.3% in 1995 from 80.4% in
1994. Total food and paper costs increased $539,000, approximately 0.7% and
increased as a percentage of restaurant sales to 31.3% in 1995 as compared to
31.2% in 1994. Direct labor cost increased $2.7 million, approximately 5.4%,
to 22.5% of restaurant sales in 1995 versus 21.4% in 1994, due to average
hourly rate increases and additional staffing for new restaurants. Assistant
restaurant manager labor cost decreased $683,000, approximately 6.5% and
decreased as a percentage of restaurant sales to 4.1% in 1995 compared to 4.4%
in 1994. Restaurant manager labor cost increased $308,000, approximately 4.3%,
due to average salary increases and additional staffing for new restaurants.
Depreciation and amortization expense increased $1.1 million, approximately
9.8%, to $12.3 million in 1995 as compared to $11.2 million in 1994. The
increase in 1995 was primarily due to new restaurants, restaurant remodeling
and various equipment replacements.
General and administrative expenses for 1995 were approximately $25.8
million, unchanged from 1994. Advertising expense increased to $9.8 million in
1995 from $9.7 million in 1994. Advertising expense as a percentage of
restaurant sales was 4.1% in 1995 and 1994. Salaries increased $155,000,
approximately 2.2%, to $7.2 million in 1995 from $7.1 million in 1994.
Employees' benefit expenses decreased by $641,000, approximately 25.3%, to
$1.9 million in 1995 as compared to $2.5 million in 1994, primarily due to a
decrease in net pension expense as reported in the Notes to Consolidated
Financial Statements included elsewhere herein and a decrease in net deferred
compensation expense. Professional fees increased by $177,000, approximately
9.6%, to $2.0 million in 1995 as compared to $1.8 million in 1994 due to
various consultations in actuarial, architectural, legal and tax services.
In December 1995, the Company recorded a provision for loss on restaurant
closings and other property write-downs of $3,911,000 as discussed in Note 4
to Consolidated Financial Statements. This provision primarily relates to the
Company's estimated losses to be incurred associated with decisions to close
specific restaurants.
A special charge of $10.0 million was recorded in 1995 in connection with
the compensation of hourly employees as discussed in Note 11 to Consolidated
Financial Statements.
Interest expense increased by $333,000, approximately 8.8%, to $4.1 million
from $3.8 million in 1994. The increase in interest expense from 1994 was due
to the issuance of $20.0 million of senior notes in two tranches of $10.0
million each on May 2, 1994 and August 2, 1994, as reported in the Notes to
Consolidated Financial Statements.
Benefit from income taxes was $3.7 million in 1995 versus a $3.0 million
provision in 1994. The Company's effective income tax rates in 1995 and 1994
were 40.9% and 32.4%, respectively, as compared to
44
the approximate combined statutory federal and state income tax rates of
38.0%. The increased effective benefit rate for 1995 and the lower effective
tax rate for 1994 primarily result from utilization of tax credits.
LIQUIDITY AND CAPITAL RESOURCES
The terms and provisions of the Reorganization Plan were approved by the
Bankruptcy Court on April 10, 1997 and became effective April 23, 1997. The
confirmed plan, which was substantially executed during the second quarter of
1997, provided for the following:
. term loans of $10.0 million and $20.0 million and a revolving loan of
$23.0 million effective April 23, 1997, and maturing April 23, 2002
(which were repaid with proceeds from the Financing);
. the payment of senior debt and secured debt totaling about $38.6 million
along with all past due interest and additional interest at 1.3% per
annum;
. the settlement of approximately 6,000 FLSA claims totaling about $12.6
million with pro se claims settled for approximately $100,000;
. the payment of holders of approximately $7.6 million of trade claims of
100% of their claims with interest at 8.5% per annum for the period
December 15, 1995-April 23, 1997.
The Company does not maintain significant inventory or accounts receivables
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 $4.8 million at September 28, 1997 compared
to a working capital surplus of $15.9 million at September 29, 1996. At
September 29, 1996, approximately $26.4 million of liabilities classified as
Liabilities Subject to Compromise during Chapter 11 status, would otherwise
have been classified as Current Liabilities.
Capital expenditures totaled approximately $5.5 million in the first nine
months of 1997 compared to $4.1 million for the same period in 1996. The
Company opened no new restaurants during the first nine months of 1997 or the
same period in 1996. Approximately $7.6 million is budgeted for capital
expenditures in 1997 for refurbishing of certain restaurants and ongoing
capital improvements. The Company owns approximately 53.8% of its restaurant
sites and leases the remainder.
On September 26, 1997 (effective September 29, 1997 for accounting
purposes), the Company was acquired by Holdings. The Acquisition was funded
through (i) the Equity Contribution, (ii) borrowings under the Credit Facility
and (iii) net proceeds of the offering of the Private Notes.
The Notes bear interest at 10 1/4% per annum and mature October 1, 2007.
Interest on the Notes is payable semi-annually on April 1 and October 1 of
each year commencing April 1, 1998. The Notes are redeemable in whole or in
part on or after April 1, 2002, at the option of the Company at the redemption
prices set forth herein, plus accrued and unpaid interest, if any, to the date
of redemption. In addition, prior to April 1, 2000 the Company may, subject to
certain conditions, redeem up to 35% of the original principal amount of the
Notes with the net proceeds of one or more Public Equity Offerings at a
redemption price equal to 110.25% of the principal amount thereof plus accrued
and unpaid interest thereon, if any, to the date of redemption. The Notes are
jointly and severally guaranteed by the Company's subsidiaries, but are
unsecured.
The Credit Facility is with SunTrust Bank, Atlanta, as agent for a group of
lenders and accrues interest at 0.0% to 0.5% over base rate or 1.0% to 2.5%
over Eurodollar rates based on the Company's funded debt coverage ratio. The
Credit Facility matures August 26, 2000, and is secured by substantially all
the tangible and intangible assets of the Company.
After acquisition of the Company's common stock, refinancing of existing
debt and payment at closing of $6.3 million of $7.3 million of transaction
costs and fees, the Company had available cash of approximately $5.9 million
and an available revolving loan facility of $9.5 million of which
approximately $4.0 million was used for letters of credit. Management believes
funds from operations, existing cash and the available Credit Facility will be
sufficient to meet its operating requirements, anticipated capital
expenditures and other obligations for the foreseeable future.
45
BUDGETED CAPITAL EXPENDITURES
Management believes that cash flow from operations, existing cash and the
available Credit Facility will be sufficient to meet its anticipated capital
expenditures and other obligations for the next 12 months.
IMPACT OF INFLATION
Although increases in labor, food and other operating costs could adversely
affect the Company's operations, management does not believe that inflation
has had a material effect on income during the past several years.
SEASONALITY
The Company believes that seasonality affects operations during the
Company's first fiscal quarter (January, February and March) as indicated by
historic trends. The Company believes that revenues are lower in the first
fiscal quarter than in other fiscal quarters as a result of changes in
consumer shopping habits in reaction to the climate during that time of year.
46
DESCRIPTION OF BUSINESS
HISTORICAL DEVELOPMENT OF KRYSTAL
The Company was founded in 1932 as a single restaurant in Chattanooga,
Tennessee by R.B. Davenport, Jr. and J. Glenn Sherrill. The Company expanded
steadily in subsequent years, entering the Georgia market in 1936, and during
the 1950's and 1960's began relocating restaurants from urban to suburban
locations and transforming its format from "cook-to-order" items to a more
standardized menu.
The Company's centerpiece of growth was its namesake, the KRYSTAL, a small,
square hamburger with steamed-in onion flavor served hot and fresh off the
grill. In the late 1960's, the Company repositioned the business away from its
specific market niche, expanding the menu to include larger hamburgers, fried
chicken and other entree items. The move placed the Company in direct
competition with other QSR chains. Despite the additional menu items, the
KRYSTAL continued to be the most popular item on the menu and the prime driver
of customer traffic.
In 1985, the Company refocused the menu, removing various entree items
previously added to compete with other QSR chains. As competition in the
restaurant industry increased in the late 1980's, the Company firmly
maintained its market niche by emphasizing the unique KRYSTAL. Krystal
Restaurants have continued to emphasize the KRYSTAL and have built their
customer base around this and other items such as "Krystal Chili," "Chili
Pups," "Corn Pups," the "Sunriser," a specialty breakfast sandwich, and the
"Country Breakfast."
On December 15, 1995, the Company filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code, solely for the purpose
of completely and finally resolving various claims of former and current
employees alleging violations of the FLSA. On April 10, 1997 the Bankruptcy
Court approved the Reorganization Plan including the settlement of the FLSA
claims which became effective on April 23, 1997. All allowed claims under the
Reorganization Plan have been paid and a final decree, terminating the
bankruptcy proceeding, is expected to be entered by the Bankruptcy Court by
the end of 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Bankruptcy Filing."
ACQUISITION
On September 26, 1997 (effective September 29, 1997 for accounting
purposes), the Company was acquired by Holdings (the "Acquisition"). At the
closing of the Acquisition, TKC, a wholly-owned subsidiary of Holdings, 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, Holdings became the owner of 100% of the common stock
of the Company.
INDUSTRY OVERVIEW
The restaurant industry continues to benefit from the trend of the average
American family to consume meals "away from home." According to the
Association, Americans consumed an average of 4.1 commercially prepared meals
per week in 1996, up from 3.8 in 1995, a 7.9% increase. An increase of 0.3
commercially prepared meals weekly has added approximately 68 million meals
weekly to the commercial foodservice market. Restaurant industry sales are
strongly correlated with factors such as population and income growth and
employment conditions. Historically, as personal disposable income increases,
consumers eat "away from home" more frequently and spend a greater portion of
their food dollar on meals "away from home." The Association projects
population, personal income and total employment to grow 1.0%, 5.1% and 1.4%,
during 1997, respectively. As a result, the restaurant industry is estimated
to grow 4.2% (assuming an inflation of 2.8%) during 1997 generating revenues
of $320.4 billion.
The QSR segment includes hamburgers, pizza, chicken, Mexican food,
fish/seafood, ice cream/yogurt, donuts, bagels and various types of
sandwiches. In recent years, the QSR industry has experienced significant
growth in both revenues and number of restaurants. Representing over 30% of
total restaurant industry revenues, the QSR segment is projected to grow 5.3%
to exceed $103.5 billion in 1997, outpacing industry growth. According to
Technomic, Inc., the QSR segment grew at a compound annual growth rate of 5.1%
between 1993
47
and 1996. Hamburgers represent almost 48% of the QSR segment, the largest food
product category, followed by pizza and sandwiches. Cahners projects the
hamburger category to grow 6.6% in 1997, exceeding the growth rates of all
other categories and the QSR segment as a whole.
Convenience, cleanliness, speed of service and perceived value continue to
be the primary factors that drive QSR revenues, along with an increasing
demand for unique taste sensations. In general, many consumers lack the
skills, knowledge, kitchen equipment or foodstuffs to reproduce their favorite
foods at home. According to a 1996 Association consumer survey, approximately
66% of adult food consumers dine "away from home" to receive flavor and taste
sensations that cannot be easily duplicated at home. Consequently, restaurants
offering a unique product with quick service at reasonable prices enjoy a
distinct competitive advantage.
COMPANY STRENGTHS
STRONG BRAND NAME RECOGNITION. Krystal Restaurants operate under one of the
most highly recognized brand names in the Southeast QSR market. The Krystal
name is synonymous with the unique KRYSTAL, a small, square hamburger with a
steamed-in onion flavor served hot and fresh off the grill. The Company has
been offering quick, friendly service and unique food products at everyday low
prices for more than 65 years. The Company's long-standing market presence and
brand name recognition have generated strong consumer loyalty, making it a
part of the fabric of life in the South.
UNIQUE KRYSTAL MENU. In addition to the signature KRYSTAL, Krystal
Restaurants offer other unique items such as "Krystal Chili," "Chili Pups,"
"Corn Pups," "Chili Cheese Fries" and the "Sunriser," a specialty breakfast
sandwich.
EVERYDAY LOW PRICES. The Company believes that it offers its high-quality
hamburgers at a lower price than the leading QSR hamburger chains. The
KRYSTAL, the Company's namesake product, is currently priced at $0.49 ($0.59
with cheese) at substantially all Krystal Restaurants. The everyday low prices
have encouraged customers to purchase the product by the "sackful" (an average
of three to four KRYSTALS per customer). Such consistent volume purchasing
supports an average check size of $3.77 and $4.09 in company-owned FSRs and
DDRs, respectively.
CONCENTRATED MARKET PRESENCE. As of September 28, 1997, the Company had a
total of 344 Company-owned and frachised restaurant locations spread
throughout the southeastern United States. By virtue of the size and regional
concentration of this restaurant system, the Company is able to leverage its
marketing and advertising expenses and benefit from distribution efficiencies.
The Company's regional concentration has created DMAs that the Company
believes generate synergies in the area of brand name recognition.
STRENGTH OF THE SOUTHEAST MARKET. According to the Association, growth in
the QSR industry is strongly correlated with factors such as population and
income growth. Krystal Restaurants are located in the following ten states:
Georgia, Tennessee, Alabama, Florida, Mississippi, Kentucky, Arkansas, North
and South Carolina and Louisiana. The Association classifies these states
under the South Atlantic and East South Central regions and predicts that, for
the foreseeable future, both regions will experience population and personal
income growth exceeding that of the United States as a whole. The Company's
DMAs are projected to experience population growth of 1.5% and real personal
income growth of 2.9% versus the projected national averages of 1.0% and 2.3%,
respectively. Considering the strength of the Southeast market, the Company is
well-positioned to benefit from these trends.
STRONG FRANCHISE PROGRAM. The Company began franchising Krystal Restaurants
in 1990, and as of September 28, 1997 had 95 franchised restaurants,
representing over 27.6% of its total restaurant system. The Company believes
that it enjoys strong relationships with its franchisees. The demand for
Krystal franchises has grown steadily since the inception of the franchise
program. The number of franchise locations has increased at a compound annual
growth rate of 29.4% from 28 in December 1992 to 95 as of September 28, 1997.
As of the same date, the Company was in various stages of negotiation to add
as many as 51 additional units by the end of 1997. For the first nine months
of 1997, the Company opened seven new franchised restaurants and from the
existing commitments expects to open an additional nine restaurants by the end
of 1997.
48
SUBSTANTIAL OWNED PROPERTIES. Over 53.8% of the Company's restaurants are
owned rather than leased, providing a significant asset base.
NEW MANAGEMENT TEAM. Immediately following the Acquisition, the Company
named Philip H. Sanford, as Chairman and Chief Executive Officer, and James F.
Exum, Jr., as President and Chief Operating Officer. Both Mr. Sanford and Mr.
Exum also serve as directors of the Company.
. PHILIP H. SANFORD. For the previous six years, Mr. Sanford was the Senior
Vice President, Finance and Administration of Coca-Cola Enterprises Inc.
("CCE"), the world's largest marketer, distributor and producer of
bottled and canned beverage products of The Coca-Cola Company. Mr.
Sanford's responsibilities included Human Resources, Treasury, Corporate
Finance, Risk Management, Internal Audit and Investment Management. As
one of the four principal executive officers of CCE, Mr. Sanford was
significantly involved in developing and implementing that company's
broad corporate strategy, with a particular focus on administrative
management, financial policy and acquisitions. Mr. Sanford was a senior
executive with Johnston Coca-Cola Bottling Group until it merged with CCE
in 1991.
. JAMES F. EXUM, JR. Mr. Exum has served as President and Chief Executive
Officer of Pennant Foods Corp., which owns and operates 75 Wendy's
restaurants since 1995. From 1991 to 1995, Mr. Exum served as President
and Chief Executive Officer of Southern California Food Services Corp.,
the predecessor to Pennant Foods Corp. Mr. Exum started in the QSR
hamburger industry in 1975 as a management trainee in a Chattanooga
Wendy's restaurant while attending college and has held every significant
position in a QSR hamburger chain.
BUSINESS STRATEGY
The Company's business strategy is to cut costs, primarily at the corporate
level, increase same-restaurant sales and add new restaurants, both company-
owned and franchised, on a selective basis. This strategy is based on the
following elements:
SIGNIFICANTLY REDUCE COST STRUCTURE. The Company's new management has
identified a number of cost savings opportunities that will improve the
Company's earnings. Management believes that the Company has maintained
disproportionately large corporate overhead expenses in relation to its
restaurant operations. The Company plans to improve profitability by
rationalizing the cost structure to bring expenses in line with industry
averages. Management believes it can achieve annual cost savings in excess of
$4.7 million by:
. Reducing Headcount. During the Company's 65-year history of family-
controlled management, a number of positions were created, primarily at
the corporate level, which in the Company's opinion were unnecessary. The
Company believes that streamlining corporate functions to resemble a head
office structure similar to that of its competitors and imposing rigid
expense controls will generate significant cost savings both from the
reduction in headcount and the associated overhead costs.
. Revamping Purchasing Strategy. The Company currently negotiates its
purchasing contracts directly with individual product vendors. The
Company also utilizes three different jobbers to warehouse and distribute
the supplies purchased from its product vendors. The Company intends to
centralize its purchasing by using one jobber instead of three and
permitting that one jobber to conduct direct negotiations with each
product vendor. The Company believes that this consolidation will allow
the Company to benefit from the size and regional concentration of its
restaurant system.
. Outsourcing Selected Functions. The Company currently performs internally
a variety of corporate tasks, such as certain tax functions and
information systems development, that could be performed more efficiently
by external sources. In the Company's opinion, certain areas of "home
grown" expertise have become uneconomical to maintain considering the
availability of industry specialists. Outsourcing
49
functions will reduce the associated overhead and allow the Company to
keep up with certain industry practices.
GROWTH OPPORTUNITIES. The Company plans to develop new Krystal Restaurants in
existing markets where Krystal has an established presence, enabling the
Company to benefit from advertising and distribution efficiencies. The Company
also plans to pursue expansion into carefully selected contiguous markets to
permit overlap benefits from neighboring markets with respect to advertising
and brand name recognition. The Company intends to target restaurant growth in
DMAs where it can achieve, or the Company has already achieved, sufficient
penetration to justify television advertising.
INCREASE FRANCHISED RESTAURANTS. The Company believes that significant
opportunities exist to increase the number of franchised Krystal Restaurants.
System expansion through franchising can provide significant additional revenue
growth with a low level of investment by the Company. Existing and potential
franchisees have expressed interest in developing Krystal Restaurants in areas
inside and outside of the Company's existing and contiguous markets. The
Company expects to evaluate and, where appropriate, pursue such opportunities,
with the intent of widening Krystal's brand name recognition at relatively low
risk and cost to the Company. In the near term, franchise location selection
will focus on "filling in" existing DMAs to improve market efficiencies and
provide suitable support for new franchise entrants.
ENHANCE KRYSTAL BRAND RECOGNITION. In 1996, the Company granted an exclusive
worldwide license to the Jimmy Dean Foods Division of Sara Lee Corporation to
manufacture, distribute and sell frozen KRYSTALS into grocery and warehouse
channels. This license has a five-year term with an optional five-year renewal
clause. The concept has been in test marketing since early 1997 in the
Birmingham-Montgomery, Alabama and Tampa-Orlando, Florida markets. The
Company's management believes there are many similar opportunities to
capitalize on the Krystal brand name in venues other than restaurants.
UPGRADE AND LEVERAGE INFORMATION TECHNOLOGY. Currently, the Company relies on
various proprietary software packages installed on mainframe computers to
control functions including accounting, labor scheduling, payroll and
purchasing. The Company believes these applications are outdated and should be
replaced with off-the-shelf programs designed specifically for the restaurant
industry. Such software upgrades would require the replacement of the Company's
mainframes with a client-server system. The costs associated with such software
and hardware upgrades would, in the Company's opinion, be more than offset by
the increased productivity of the required accounting staff, improved labor
scheduling and more efficient delivery of the real-time information required by
management to effectively allocate resources in making price, product and
promotional decisions.
FOCUS ON UNIQUE, QUALITY PRODUCTS AND SUPERIOR CUSTOMER SERVICE. The Company
intends to refocus operations on the core values upon which the Company was
founded. This involves reemphasizing quality food at everyday low prices served
by a friendly staff in clean restaurants. The Company will redesign training
and incentive programs to reorient staff and management toward these goals.
RESTAURANT OPERATIONS
Menu. Krystal Restaurants offer a substantially uniform menu consisting of
the well-known KRYSTAL, "Krystal Chili," "Chili Pups," "Corn Pups," "Chili
Cheese Fries," "Krystal Chicken Sandwich," the "Sunriser," a specialty
breakfast sandwich, and the "Country Breakfast." While emphasizing the KRYSTAL,
the menu is designed to provide choices to satisfy a broad range of consumer
preferences. The Company also test markets new products from time to time.
Format. The Company has developed three formats for its restaurant locations.
Format selection for individual restaurant sites involves consideration of a
number of factors, including site location and site availability. The three
Krystal Restaurant formats are as follows:
50
. FULL-SIZE RESTAURANTS ("FSRS"). The Company's full-size restaurants offer
the full Krystal menu and range in size from 1,800 to 3,100 square feet,
20 to 80 seats and 30 to 50 parking spots. FSR new unit investment is
estimated to range from $645,450 to $862,650 without land. The typical
FSR is open 24 hours a day and generates an average check size of $3.77
in company-owned restaurants and $4.05 in franchised restaurants. Located
primarily in suburban areas, FSRs generally draw traffic from a three to
five mile radius.
. DOUBLE DRIVE-THRU RESTAURANTS ("DDRS"). The DDR format was developed
primarily in response to customer demand for quicker service. Less than
one-third the size of FSRs and requiring a significantly lower capital
investment (ranging from approximately $387,950 to $550,650 without
land), DDRs range in size from 350 to 640 square feet and generate an
average check size of $4.09 in company-owned restaurants and $4.29 in
franchised restaurants. The higher average check size and lower initial
capital outlay has made the DDR an attractive format choice for
franchisees.
. NON-TRADITIONAL RESTAURANTS ("NTRS"). Recently, the Company has opened
restaurants in a "store-within-a-store" concept (i.e. convenience
stores). The strong Krystal brand name drives traffic to the underlying
store, making the addition of a Krystal counter an attractive investment
opportunity for the owners of such stores seeking to increase customer
traffic. New unit investment for this format ranges from $191,575 to
$494,900. On average, these locations generate average check sizes of
$3.82.
Restaurant Sales Data. The following table sets forth certain restaurant
operating data for the periods indicated:
NINE MONTHS
FISCAL YEAR ENDED ENDED
------------------------------------ -------------
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1995 1996 1997
---------- ------------ ------------ -------------
(DOLLARS IN THOUSANDS EXCEPT CHECK-SIZE
INFORMATION)
Average sales per Compa-
ny-owned restaurant:
FSRs................... $ 987 $ 956 $ 956 $ 733
DDRs................... 487 534 521 399
Combined............... 960 939 937 718
Same-restaurant sales
(decrease) vs. prior
years:
Company-owned.......... (1.7)% (2.9)% (0.4)% 3.1%
Franchised............. (5.8) (5.5) (6.2) (1.3)
Average Check-Size
Company-owned.......... $3.38 $3.46 $3.60 $3.78
Franchised............. 3.86 3.87 3.93 4.07
RESTAURANT DEVELOPMENT
In 1996, 13 new Krystal Restaurants were opened, including six NTRs in
convenience stores and for the nine months ended September 28, 1997 a further
seven Krystal Restaurants were added, of which six were NTRs. These NTRs,
typically licensed to multi-unit convenience store operators, represent an
important growth vehicle as they allow the Company to pursue two core
development strategies (i) to "fill in" existing markets with the optimum
number of restaurants in smaller, secondary trading areas that would not
typically support a free-standing restaurant; and (ii) to increase the speed
of expansion in existing markets by joining with partners who have the
resources and skills to roll-out quickly multi-unit operations.
The Company believes that it can sustain average unit growth of 20 to 35
units per year representing a five to 10% growth in the overall system. From
January 1, 1992 to September 28, 1997, 131 restaurants were opened, of which
35 were company-owned and 96 were franchised, and 34 restaurants were closed,
of which 20 were company-owned and 14 were franchised. This net increase of 97
restaurants represents an average annual increase of 6.8%. Company-owned
restaurant expansion was suspended during the bankruptcy proceedings; recent
system growth has been provided by franchisees.
51
The following table sets forth the development of Krystal Restaurants from
1992 through the first nine months of 1997.
NUMBER OF RESTAURANTS
------------------------
COMPANY
YEAR OWNED FRANCHISED TOTAL
---- ------- ---------- -----
1992........................ 231 28 259
1993........................ 240 44 284
1994........................ 252 65 317
1995........................ 256 80 336
1996........................ 249 89 338
1997 (first nine months).... 249 95 344
RESTAURANT LOCATIONS
The following table sets forth the number of restaurants in the Company's
system as of September 28, 1997.
ALABAMA
MARKET COMPANY FRANCHISED TOTAL
------ ------- ---------- -----
Anniston.................... 0 1 1
Birmingham.................. 13 3 16
Dothan...................... 0 1 1
Huntsville.................. 11 4 15
Mobile...................... 9 3 12
Montgomery.................. 5 3 8
--- --- ---
Subtotal.................. 38 15 53
ARKANSAS
MARKET COMPANY FRANCHISED TOTAL
------ ------- ---------- -----
Jonesboro................... 0 1 1
--- --- ---
Subtotal.................. 0 1 1
FLORIDA
MARKET COMPANY FRANCHISED TOTAL
------ ------- ---------- -----
Jacksonville................ 17 3 20
Orlando..................... 19 0 19
Panama City................. 0 2 2
Tallahasse, Thomasville, GA. 2 1 3
Tampa....................... 3 1 4
--- --- ---
Subtotal.................. 41 7 48
GEORGIA
MARKET COMPANY FRANCHISED TOTAL
------ ------- ---------- -----
Albany...................... 4 1 5
Atlanta..................... 46 17 63
Augusta..................... 5 2 7
Columbus.................... 9 1 10
Macon....................... 8 2 10
Savannah.................... 6 3 9
--- --- ---
Subtotal.................. 78 26 104
52
KENTUCKY
MARKET COMPANY FRANCHISED TOTAL
------ ------- ---------- -----
Bowling Green............... 2 0 2
Lexington................... 0 5 5
Paducah-Harrisburg.......... 0 1 1
--- --- ---
Subtotal.................. 2 6 8
LOUISIANA
MARKET COMPANY FRANCHISED TOTAL
------ ------- ---------- -----
New Orleans................. 0 1 1
--- --- ---
Subtotal.................. 0 1 1
MISSISSIPPI
MARKET COMPANY FRANCHISED TOTAL
------ ------- ---------- -----
Columbus-Tupelo............. 0 2 2
Gulfport.................... 0 2 2
Greenville.................. 0 1 1
Hattiesberg................. 2 2
Jackson..................... 8 5 13
Meridian.................... 0 1 1
--- --- ---
Subtotal.................. 10 11 21
NORTH CAROLINA / SOUTH CAROLINA
MARKET COMPANY FRANCHISED TOTAL
------ ------- ---------- -----
Charlotte................... 0 2 2
Greenville, Spartanburg,
Asheville.................. 0 1 1
--- --- ---
Subtotal.................. 0 3 3
TENNESSEE
MARKET COMPANY FRANCHISED TOTAL
------ ------- ---------- -----
Bristol-Kingsport-Johnson
City....................... 0 3 3
Chattanooga................. 19 1 20
Jackson..................... 1 1 2
Knoxville................... 16 6 22
Memphis..................... 15 6 21
Nashville................... 29 8 37
--- --- ---
Subtotal.................. 80 25 105
=== === ===
Totals.................... 249 95 344
=== === ===
FRANCHISE OPERATIONS
The Krystal franchise system includes three distinct types of franchise
agreements (the "Franchise Agreements").
Standard Franchise Agreement: Pursuant to a standard franchise agreement (a
"Standard Agreement"), a franchisee acquires the right to operate a single
Krystal restaurant at a specific location for a standard term of ten years. A
fee of $32,500 (the "Franchise Fee") is payable upon execution of a Standard
Agreement. In addition, each Standard Agreement requires the franchisee to pay
a franchise royalty and service fee and a marketing
53
contribution equal to a percentage of the weekly gross receipts generated by
the franchised restaurant as well as other fees related to, among other
things, additional training and assistance. A Standard Agreement can be
renewed for a term of ten years if the franchisee meets certain requirements.
Subsequent to a renewal term, a franchisee can request any number of successor
franchise agreements provided that the requesting franchisee is in good
standing with the Company.
Multi-Unit Franchise Development Agreement: A multi-unit franchise
development agreement (a "Multi-Unit Agreement") provides a franchisee with
the right and license to develop a certain number of restaurants in a defined
geographic territory within a specified period of time. A separate Standard
Agreement must be executed and a Franchise Fee must be paid for each
restaurant developed under a Multi-Unit Agreement. A development fee of
$12,500 is required for each restaurant developed pursuant to a Multi-Unit
Agreement. This development fee is then credited toward the Franchise Fee
payable for each restaurant. A Multi-Unit Agreement is not renewable and
expires on the date that the last restaurant to be developed under the
agreement opens or is scheduled to be opened.
Non-Traditional Location License Agreement: A non-traditional location
license agreement (a "Non-Traditional License Agreement") provides a licensee
with the right to operate a restaurant unit in a non-traditional location such
as a convenience store for a term of either five or ten years depending on the
license fee amount. A license fee of $8,125 is required for a five-year term
and a license fee of $16,250 is required for a ten-year term. In addition to a
license fee, each licensee under a Non-Traditional License Agreement must pay
a license royalty and service fee and a marketing contribution equal to a
percentage of the weekly gross receipts generated by the franchised unit as
well as certain other fees. Non-Traditional License Agreements can be renewed
for successive five-year terms provided that the requesting licensee is in
good standing with Krystal.
As of September 28, 1997, there were 95 franchised units of which 82 were
operated under Standard Agreements and 13 were operated under Non-Traditional
License Agreements. Total revenues received by the Company from franchising
activities amounted to approximately $3.0 million in 1995, $3.1 million in
1996, and $2.5 million as of September 28, 1997.
Eight of the Company's Franchise Agreements are due to expire in 2000 and an
additional 29 are due to expire during the two years thereafter. The Company
believes that it enjoys a good relationship with its franchisees and that the
Company will be able to renew substantially all of the Franchise Agreements
due to expire as set forth above at their expiration.
The Franchise Agreements do not grant exclusive territories and can be
terminated by the Company upon failure of a franchisee to comply with the
terms of the Franchise Agreement, including the Company operating policies,
and for certain other events. Each of the three types of Franchise Agreements
is assignable by the franchisee only with the Company's consent. Krystal
franchisees obtain their own financing.
SUPPLIERS AND DISTRIBUTION
The Company negotiates prices directly with wholesale suppliers for the
purchase of food, equipment, beverages and other supplies ("Supplies"). Under
the terms negotiated by the Company, the Supplies are then sold to third-
parties ("Jobbers") who warehouse and sell the Supplies to the Company as
needed. Currently, the Company purchases its Supplies through three Jobbers
with approximately 80% of the total purchases made through a single Jobber,
PYA Monarch. However, the Company feels that alternative Jobbers (and
suppliers) are available or can be made available without material
interruption to the Company's operations and that benefits can be derived from
consolidating 100% of the Company's purchases with one Jobber. Franchisees may
purchase their Supplies from the same suppliers used by the Company or from
other company-approved suppliers.
54
QUALITY ASSURANCE
The Company currently maintains an in-house quality control department that
monitors and enforces standards on products, and continually evaluates food
quality in all restaurants. The restaurants prepare, assemble and package food
products using specifically designed production techniques and equipment to
obtain uniform standards of quality. In recent years, additional emphasis has
been placed on the development and support of product quality and consumer
quality assurance. Supplier and product monitoring activities include periodic
manufacturing facility audits, product sampling and analysis of products
according to certain well-defined criteria.
LICENSE AGREEMENT
In 1996, the Company granted an exclusive worldwide license to the Jimmy
Dean Foods Division of Sara Lee Corporation to manufacture, distribute and
sell frozen KRYSTALS into grocery and warehouse channels. The license has a
five-year term with an optional five-year renewal clause. The concept has been
in test market since early 1997 in the Birmingham-Montgomery, Alabama and
Tampa-Orlando, Florida markets. In connection with the test marketing, Krystal
is also conducting research to determine the impact of the program (i) on the
Krystal brand name, (ii) on restaurant sales and (iii) on the amount of
potential ancillary income. The results of the test marketing and related
research are not yet complete. Should the Company decide to go forward, the
initial roll-out will occur in present Krystal markets, and the Company will
be required under the license agreement to invest approximately $210,000 in
addition to the $140,000 already invested in the program. Should the Company
decide not to go forward for any reason other than non-performance by Sara
Lee, the Company is required to pay to Sara Lee $100,000.
COMPETITION
The QSR industry is highly competitive with respect to price, product
quality, variety and taste, speed of service, convenience of location and
restaurant cleanliness and upkeep. The Company believes that Krystal
Restaurants compete effectively in each of the aforementioned categories in
its DMAs. Factors such as inflation, increases in food, labor (including
health care) and energy costs and the availability of an adequate number of
hourly-paid employees also affect the QSR industry. In each of its markets,
the Company competes with large national QSR chains, some of which have
greater financial resources than the Company. Regional QSR chains,
delicatessens, food counters, cafeterias and other local restaurants offering
moderately priced menus also compete with the Company. The Company believes
that the only other QSR chain with similar products and pricing is White
Castle, whose presence in the Company's market is limited to three restaurants
in Nashville, Tennessee.
With respect to the sale of franchises, the Company competes with many
franchisors of restaurants, including franchisors of QSR food concepts and
other business concepts. The Company believes that it succeeded in attracting
a number of franchisees due to the strength of the Krystal brand name and the
Company's regional presence. In general, there is also active competition for
management personnel, capital and attractive commercial real estate sites
suitable for restaurants.
EMPLOYEES
As of September 28, 1997, the Company employed 8,593 employees of which 844
were salaried employees and 7,749 were hourly wage earners. The Company does
not have contracts with any unions or any of its employees. Approximately 37%
of Krystal's employees are paid the minimum wage and, consequently, their rate
of pay is increased as mandated by applicable laws. Effective September 1,
1997, the Federal minimum wage increased from $4.75 to $5.15. See "Risk
Factors--Minimum Wage Increase." The Company had been anticipating this
increase, and believes that it can offset such increases through pricing
increases and cost reductions.
RESTAURANT STAFFING AND TRAINING
A typical FSR or DDR during peak hours is staffed with eight to 14 crew
members with a manager or assistant manager on the premises at all times. The
function of assuring that each company-owned restaurant
55
consistently delivers high-quality food and service is performed by district
supervisors, who report to directors of area operations. Directors of area
operations, in turn, report to the director of field operations. District
supervisors and directors of area operations are compensated with a fixed
salary plus a bonus based on the performance of the restaurants under their
supervision. On average, the Company has one district supervisor for every
seven Krystal Restaurants for a total of 35 positions and eight directors of
area operations.
The Company's current training programs emphasize quality food preparation,
quick service, cleanliness of restaurants, courteous employees and consistency
of execution. The Company hosts the Krystal achievement program for its
restaurant crews, a program that utilizes video and hands-on training to
communicate the Company's values relating to customer service and food
quality. Shift managers experience a six-week, off-site basic operations
program, which includes both hands-on and classroom training. A follow-up 13-
week advanced operations course is conducted on-site, reviewing labor
scheduling, food safety and management practices. Additionally, the Company
conducts frequent technical seminars that cover a variety of topics including
inventory management, sensitivity training (i.e., sexual harassment seminars)
and customer service techniques. The Company believes that training is
important to the success of Krystal Restaurant operations and expects to
continue these programs and seminars in some form.
ADVERTISING AND PROMOTION
The Company utilizes a three-tiered marketing strategy funded by both
franchised and company-owned restaurants to grow sales. Broadcast media (TV
and radio) create brand awareness and quickly communicate new promotional
programs to a large audience. The majority of markets in which the Company has
restaurants (15 out of 23 markets) have a full broadcast marketing program.
Print media (newspaper inserts, direct mail) generate trial and repeat
customer visits by offering incentives (usually in the form of coupons) to
purchase promoted menu items or discounted meal offers. These programs can be
tailored to local-market or restaurant-specific situations. Finally, the in-
restaurant merchandising (signage and point-of-purchase advertising)
encourages customers to try new offers or to increase the check amount through
combo meals and portion trade-up offers.
The annual promotional calendar typically has seven media-supported events,
consisting of either value-offers of current menu items, normally focused on
the KRYSTAL, or limited time offers ("LTOs") of new menu items. The objective
of the LTOs is to increase short-term sales by giving consumers a new reason
to visit Krystal while simultaneously enhancing Krystal's brand name and value
perception by offering distinctive tasting items at a good price.
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 regards these trademarks as having significant value and
as being important to current and future marketing efforts. The Company
intends to pursue registration of these marks whenever possible and oppose
vigorously any infringement of these marks.
56
PROPERTIES
As of September 28, 1997, the Company owned or leased a total of 249 real
property sites for the operation of FSRs and DDRs. These sites are further
described in the following table:
PERCENT OF HISTORICAL PERCENT OF
DESCRIPTION NUMBER TOTAL GROSS COST TOTAL
----------- ------ ---------- -------------- ----------
(IN THOUSANDS)
Owned and mortgaged........... 134 53.82% 109,045 68.81%
--- ------ ------- ------
Total owned.................. 134 53.82% 109,045 68.81%
Ground leased and building
owned........................ 64 25.70% 31,511 19.88%
Land and building leased,
improved by the company...... 51 20.48% 17,928 11.31%
--- ------ ------- ------
Total leased................. 115 46.18% 49,439 31.19%
--- ------ ------- ------
Total restaurants............ 249 100.00% 158,484 100.00%
=== ====== ======= ======
The average remaining life under the Company's capital and operating leases
is approximately five years, without consideration of renewal privileges.
Including these renewal arrangements, the average life remaining is
approximately 13 years. The Company also owns five parcels and leases one
unimproved parcel of real property for future use as restaurant sites. The
Company also owns one and leases 24 restaurant sites in the Baltimore,
Washington, D.C. and St. Louis metropolitan areas, which it in turn leases or
subleases to Davco Restaurants, Inc. ("Davco"), a Wendy's International, Inc.
franchisee and former affiliate of the Company. The Company believes that it
will be able to renew all of the aforementioned leases upon their expiration
at commercially acceptable rates or sell the sites to Davco or a third party.
The Company leases 45,741 square feet of space for its corporate
headquarters located at One Union Square in Chattanooga, Tennessee. This lease
expires on June 30, 1998. The Company believes that it will be able to renew
this lease, or find alternative space, at rates that are similar to or better
than the current rate.
The Company seeks to remodel its stores every three to five years, on
average, which generally entails remodeling of the dining area, and cleaning
and maintenance of the kitchen and storage areas. The timing of the decision
to remodel restaurants depends on such factors as store type and age, traffic
and location. The Company believes that its stores are modern and in a good
state of repair.
AVIATION OPERATIONS
Through subsidiary companies, the Company began operating a fixed base
hangar and airplane fueling operation in 1977 and managing the leasing of
airplanes in 1989. The Company's wholly-owned subsidiary, Krystal Aviation Co.
("Aviation") operates a fixed base airport hangar in Chattanooga, Tennessee.
Aviation's revenues in each of the last three years were less than three
percent of the Company's total revenues. Aviation contributed $839,000,
$482,000 and $434,000 million in EBITDA in each of 1994, 1995 and 1996,
respectively. Results in 1995 and 1996 included write-downs associated with
the acquisition of Signal Aviation and the elimination of maintenance
operations in connection with that acquisition.
For the first nine months of 1997, Aviation had revenues of approximately
$3.5 million. Revenues for the same period from the preceding year were also
approximately $3.4 million. EBITDA for the first nine months of 1997 was
$628,000 compared to $315,000 for the same period of the preceding year. The
Company believes that EBITDA for the first nine months of 1997 was higher than
EBITDA for the same period from the preceding year largely as a result of the
elimination of maintenance operations.
GOVERNMENT REGULATION
Various Federal, state and local laws affect the operation of Krystal
Restaurants including various health, sanitation, fire and safety standards.
Newly constructed or remodeled restaurants are subject to state and local
57
building code and zoning requirements. In connection with the remodeling and
alteration of Krystal Restaurants, the Company may be required to expend funds
to comply with certain Federal, state and local regulations, including
regulations requiring remodeled or altered buildings to be handicap
accessible.
The Company is subject to the Fair Labor Standards Act and various state
laws governing such matters as minimum wage requirements, overtime and other
working conditions and citizenship requirements. A significant number of
Krystal's food service personnel are paid at rates related to the Federal
minimum wage, and increases in the minimum wage could increase labor costs.
Effective September 1, 1997, the Federal minimum wage increased from $4.75 to
$5.15. See "Risk Factors--Minimum Wage Increase."
State laws that regulate the offer and sale of franchises and the
franchisor-franchisee relationship presently exist in a significant number of
states. Such laws generally require registration of the franchise offering
with state authorities and regulates the franchisor-franchisee relationship
by, for example, requiring the franchisor to deal with the franchisees in good
faith, prohibiting interference with the right of free association among
franchisees, limiting the imposition of standards of performance on a
franchisee and regulating discrimination among franchisees in charges, fees or
royalties. These laws have not precluded the Company from seeking franchisees
in any given area. Although such laws may restrict a franchisor in the
termination of a franchise agreement by, for example, requiring "good cause"
to exist as a basis for the termination, advance notice to the franchisee of
the termination, an opportunity to cure a default and repurchase of inventory
or other compensation, these provisions have not had a significant effect on
the Company's operations.
ENVIRONMENTAL MATTERS
While the Company is not aware of any Federal, state or local environmental
regulations that will materially affect the Company's operations or
competitive position, or result in material capital expenditures, it cannot
predict the effect on its operations from possible future legislation or
regulation. For the nine months ended September 28, 1997, other than normal
equipment expenditures, the Company made no material capital expenditures for
environmental control facilities and the Company does not presently anticipate
any such material expenditures. See "Risk Factors--Environmental Matters."
LITIGATION
The Company is party to various legal proceedings incidental to its
business. In the opinion of the Company, the resolution of these proceedings
will not have a material adverse effect on the Company's financial condition
or results of operations.
58
MANAGEMENT
The directors and senior management of the Company are:
Philip H. Sanford..................... 44 Chairman, Chief Executive Officer and Director
James F. Exum, Jr..................... 40 President, Chief Operating Officer and Director
Gordon L. Davenport, Jr............... 38 Vice President, Marketing
Larry J. Reeher....................... 50 Vice President, Human Resources
A. Alexander Taylor, II............... 44 Secretary and General Counsel
Clay H. Buckner, Jr................... 60 Treasurer, Controller and Principal Accounting Officer
W.A. Bryan Patten..................... 56 Director
Richard C. Patton..................... 36 Director
Benjamin R. Probasco.................. 36 Director
Philip H. Sanford was Senior Vice President, Finance and Administration, of
Coca-Cola Enterprises Inc., for the last six years. Mr. Sanford was a senior
executive with Johnston Coca-Cola Bottling Group until 1991.
James F. Exum, Jr. was President and Chief Executive Officer of Southern
California Food Services Corp., from 1991 to 1995. From 1995 to September
1997, Mr. Exum served as President and Chief Executive Officer of Pennant
Foods Corp., Knoxville, Tennessee.
Gordon L. Davenport, Jr. has been Vice President--Marketing and New Business
at Krystal since November 1995. From 1986 to 1995, Mr. Davenport served in
various marketing and sales management positions with Warner Lambert Company.
Larry J. Reeher has been Vice President--Human Resources since August 1995.
From 1988 to 1995, Mr. Reeher was Executive Vice President--Human Resources
for Gardner Merchant Food Services, Inc.
A. Alexander Taylor, II has been a partner with the law firm of Miller &
Martin since 1983. Mr. Taylor is a director of Chattem, Inc., a consumer
products company, and U.S. Xpress Enterprises, Inc., a transportation company.
Clay H. Buckner, Jr. was elected as Treasurer, Controller and Principal
Accounting Officer of the Company on October 8, 1997. Mr. Buckner has served
as Controller since September 1994 and in several accounting positions with
the Company since 1977.
W.A. Bryan Patten is the President of Patten & Patten Inc., a registered
investment advisory firm in Chattanooga, Tennessee.
Richard C. Patton 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 employed at Probasco & Company, a real estate
development company, since 1997. Prior to joining Probasco & Company, Mr.
Probasco spent six years at Leonard, Kinsey & Associates from 1991 to 1997 and
from 1983 to 1988 was employed at Johnston Coca-Cola Bottling Group.
59
EXECUTIVE COMPENSATION
The following table summarizes the total compensation for the last three
fiscal years of the Chief Executive Officer and the four other most highly
compensated executive officers of the Company during the last fiscal year.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- ------------
RESTRICTED
OTHER ANNUAL STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS(2)
- --------------------------- ---- -------- ----- --------------- ------------
Carl D. Long(3)............. 1996 $365,000 $ 0 $13,075 --
Chairman of the Board of 1995 365,000 0 25,952 --
Directors, Chief Executive
Officer 1994 365,000 0 14,625 --
R. B. Davenport, IV(4)...... 1996 200,000 0 6,440 --
President, Chief Operating 1995 200,000 0 9,985 --
Officer 1994 200,000 0 9,971 --
Camden B. Scearce(5)........ 1996 145,619 0 8,392 --
Vice President, Chief 1995 133,005 0 8,767 --
Financial Officer, 1994 126,672 0 15,075 --
Secretary, Treasury
Gordon L. Davenport, Jr.(6). 1996 152,023 0 5,548 --
Vice President--Marketing 1995 51,154 0 15,528(7) $186,000(8)
and Development
James R. Ventura(9)......... 1996 140,394 0 14,950 --
Vice President--Franchise 1995 133,224 0 7,466 --
Operations 1994 129,689 0 5,904 --
- --------
(1) Consists of the costs of personal benefits provided to the named executive
officer by the Company.
(2) The fair market value of restricted stock awards is calculated by
multiplying the closing market price of unrestricted stock on the date of
grant by the number of shares awarded. The fair market value of the
949,360 aggregate restricted shares held as of the end of the Company's
1996 fiscal year based upon the trading price at the close of business on
December 27, 1996, was $5,458,820. Holders of restricted stock are
entitled to any dividends declared upon the common stock of the Company.
(3) Mr. Long resigned from the Company on September 25, 1997.
(4) Mr. R. B. Davenport, IV resigned from the Company on September 26, 1997.
(5) Mr. Scearce resigned from the Company on October 31, 1997.
(6) Mr. Gordon L. Davenport, Jr. was hired as Vice President--New Business and
Strategic Planning on August 30, 1995. Mr. Gordon L. Davenport, Jr. is the
nephew of R. B. Davenport, III and a first cousin of R. B. Davenport, IV.
(7) Includes moving bonus of $12,500.
(8) Represents 24,000 shares of restricted stock valued at $7.75, the trading
price at the close of business on the date of grant.
(9) Mr. Ventura retired as Vice President--Franchise Operations as of December
31, 1996.
60
The following table sets forth the compensation to be paid to certain
members of the Company's senior management (the "Named Executive Officers") on
an annual basis. There are no employment agreements with any of these
individuals.
ANNUAL
NAME COMPENSATION
---- ------------
Philip H. Sanford......................... $350,000
Chairman and Chief Executive Officer
James F. Exum, Jr......................... $300,000
President and Chief Operating Officer
The Company expects to adopt performance-based incentive compensation plans
for senior management of the Company, including a cash management bonus plan
and a stock ownership plan, under which total awards may, in the aggregate,
equal 10% of the outstanding common stock of the Company on a fully-diluted
basis, assuming exercise of options. Non-employee directors receive a fee of
$1000 for each Board of Directors meeting attended
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT OF THE COMPANY
All of the outstanding capital stock of the Company is held by Holdings. The
following table sets forth certain information regarding beneficial ownership
of the common stock of Holdings by: (i) each person who holds more than 5% of
the common stock of Holdings, (ii) each director of the Company, (iii) each of
the Named Executive Officers and (iv) all directors and Named Executive
Officers as a group. The address of each of the holders of more than 5% of the
common stock of Holdings is c/o The Krystal Company, 10th Floor, Krystal
Building, Chattanooga, Tennessee 37402.
PERCENT
NAME AMOUNT OF BENEFICIAL OWNERSHIP OF CLASS
---- ------------------------------ --------
Philip H. Sanford....................... 2,600,000 26.0
W.A. Bryan Patten(1).................... 863,333 8.6
Richard C. Patton(2).................... 1,233,333 12.3
Benjamin R. Probasco(3)................. 863,333 8.6
James F. Exum, Jr....................... 0 0
Katherine J. Johnston Trust............. 1,233,333 12.3
Woodmont Capital, LLC................... 1,233,333 12.3
P&P Port Royal Investors, LP............ 863,333 8.6
All directors and Named Executive
Officers as a group (5 persons)........ 5,559,999 55.6
- --------
(1) Includes shares held by P&P Port Royal Investors, LP, of which P&P PRI,
LLC is the general partner, of which Patten & Patten, Inc. is the manager.
Mr. Patten is a director, officer and shareholder of Patten & Patten, Inc.
(2) Includes shares held by Woodmont Capital, LLC, of which Mr. Patton is the
President.
(3) Includes shares held by trusts of which Mr. Probasco is a beneficiary.
61
DESCRIPTION OF CAPITAL STOCK
The Company has 100 shares of common stock authorized, 100 of which are
issued and outstanding. Holdings owns all of the Company's issued and
outstanding common stock, which stock has been pledged to the lenders under
the Credit Facility. The Company has no shares of preferred stock authorized.
DESCRIPTION OF CREDIT FACILITY
GENERAL
The Company has a $25 million senior secured revolving credit facility (the
"Credit Facility") provided by SunTrust Bank, Atlanta, as agent, and the Union
Bank of Switzerland, New York Branch, an affiliate of the Initial Purchaser,
as syndication agent (collectively, the "Lenders"). The Credit Facility is
secured by a perfected first priority security interest in substantially all
of the tangible and intangible assets of the Company. The Credit Facility is
guaranteed on a senior basis by (i) Holdings, which guarantee is secured by a
pledge of all of the Company's common stock held by Holdings and (ii) each
existing and future subsidiary of the Company. This information relating to
the Credit Facility is qualified in its entirety by reference to the complete
text of the documents entered into in connection therewith, copies of which
are included as exhibits to the Registration Statement of which this
Prospectus is a part.
Borrowings under the Credit Facility were used to finance a portion of the
Acquisition, pay for transaction costs related to the Acquisition, refinance
outstanding debt of the Company and provide for the working capital and
general corporate needs of the Company. The revolving credit loans will bear
interest at a rate based upon either, at the Company's election, the SunTrust
Bank base rate (as applicable) or in the form of a LIBOR-based rate plus, in
each case, a borrowing margin which is determined on the basis of the
Company's funded debt/EBITDA ratio. The borrowing margin for SunTrust Bank
base rate loans ranges from a minimum of 0.0% to a maximum of 0.50% and for
LIBOR-based loans from a minimum of 1.25% to a maximum of 2.75%.
Notwithstanding the foregoing, prior to September 30, 1998, the borrowing
margin will be fixed at 0.50% for SunTrust Bank base rate loans and 2.75% for
LIBOR-based loans. The Credit Facility will terminate 35 months after the date
of the closing with respect thereto. Outstanding revolving credit loans will
be payable on such date or such earlier date as may be accelerated following
the occurrence of an event of default.
CERTAIN COVENANTS
The Credit Facility contains covenants that restrict the Company from taking
certain actions and that requires the Company to achieve and maintain certain
financial covenants. The Company is not permitted to exceed a maximum funded
debt/EBITDA ratio and is required to maintain a minimum fixed charge coverage
ratio and meet minimum net worth requirements. The Credit Facility includes
other covenants that impose limitations on capital expenditures, sale and
leaseback transactions, indebtedness, liens, mergers or consolidations,
dividend payments, loans and advances, affiliate transactions and certain
other corporate activities. The Credit Facility prohibits certain changes in
control of Holdings.
EVENTS OF DEFAULT
The Credit Facility contains customary events of default, including
nonpayment of principal, interest or fees, violation of covenants, inaccuracy
of representations or warranties in any material respect, cross default to the
payment of other indebtedness of the Company, bankruptcy, environmental
matters, material judgments and material liabilities and change of control.
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DESCRIPTION OF THE NOTES
GENERAL
The Exchange Notes will be issued pursuant to an indenture (the "Indenture")
dated as of September 26, 1997 among the Company, as issuer, and SunTrust
Bank, Atlanta, as trustee (the "Trustee"), as supplemented by Supplemental
Indenture No. 1 dated as of September 26, 1997 between the Company, the
Guarantors and the Trustee (together, the "Indenture"). For purposes of this
summary, the term "Notes" refers to both the Exchange Notes and the Private
Notes. The terms of the Exchange Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act
of 1939, as amended (the "Trust Indenture Act"). The Exchange Notes are
subject to all such terms, and Holders (as defined herein) of Exchange Notes
are referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summary of certain provisions of the Indenture does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below.
Copies of the Indenture and the Registration Rights Agreement are available
without charge from the Company or the Trustee as set forth under "Additional
Information." Definitions of certain terms used in the following summary are
set forth below under the caption "Certain Definitions."
The Notes will be unsecured senior general obligations of the Company,
ranking senior in right of payment to all existing and future subordinated
indebtedness of the Company and pari passu with all existing and future
unsecured senior Indebtedness of the Company. The Notes will be guaranteed on
a senior unsecured basis (a "Note Guarantee") by Krystal Aviation Co., Krystal
Aviation Management Co. and all other existing and future Subsidiaries of the
Company (each, a "Guarantor") and the Company will cause each future
Subsidiary of the Company to enter into a supplemental indenture providing for
a Note Guarantee as required in the Indenture. The Credit Agreement and the
guarantees of the Company's obligations thereunder are secured by
substantially all of the existing and future assets of the Company and its
Subsidiaries. As a result, the Notes and the Note Guarantees will be
effectively subordinated in right of payment to all existing and future
indebtedness under the Credit Agreement and the guarantees thereunder as well
as to all other existing and future secured Indebtedness permitted to be
incurred under the Indenture to the extent of the value of the assets securing
such indebtedness.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $100 million and
will mature on October 1, 2007. Interest on the Notes will accrue at the rate
of 10 1/4% per annum and will be payable semiannually in arrears on April 1
and October 1, commencing on April 1, 1998, to Holders of record on the
immediately preceding March 15 and September 15. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date on which the Notes were originally
issued. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months. Principal, premium, if any, interest and Additional
Interest on the Notes will be payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest and Additional Interest may be made
by check mailed to the Holders of the Notes at their respective addresses set
forth in the register of Holders of Notes; provided that all payments with
respect to Global Notes and Certificated Notes (as such terms are defined
below under the caption "Book Entry, Delivery and Form"), the Holders of which
have given wire transfer instructions to the Company, will be required to be
made by wire transfer of immediately available funds to the accounts specified
by the Holders thereof. Until otherwise designated by the Company, the
Company's office or agency in New York will be in the office of the Trustee
maintained for such purpose. The Notes have been and will be issued only in
fully registered form, without coupons and in denominations of $1,000 and
integral multiples thereof; provided that Certificated Notes originally
purchased by or transferred to institutional "accredited investors" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who are
not "qualified institutional buyers" (as defined in Rule 144A under the
Securities Act) will be subject to a minimum denomination of $250,000.
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NOTE GUARANTEES
Under any existing and future Note Guarantee, the Guarantors irrevocably and
unconditionally, jointly and severally, guarantee the performance and punctual
payment when due, whether at stated maturity, by acceleration or otherwise, of
all Obligations of the Company under the Indenture and the Notes. Each of the
Guarantors will agree to pay, in addition to any amount stated above, any and
all expenses (including reasonable counsel fees and expenses) incurred by the
Trustee in enforcing any rights under the Note Guarantee. Each Note Guarantee
will be limited in amount to an amount not to exceed the maximum amount that
can be guaranteed by the relevant Guarantor without rendering such Note
Guarantee as it relates to such Guarantor voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. See "Risk Factors--Fraudulent
Conveyance Risks."
Each Note Guarantee will be a continuing guarantee and shall (a) remain in
full force and effect until payment in full of all of the Company's
Obligations under the Indenture and the Notes and (b) inure to the benefit of
and be enforceable by the Trustee, the Holders and their successors,
transferees and assigns. Each Note Guarantee shall be a guarantee of payment
and not of collection.
The Indenture provides that in the event of a sale or other disposition of
all or substantially all of the assets of any Guarantor or a sale or other
disposition of all of the Capital Stock of any Guarantor, by way of merger,
consolidation or otherwise, such Guarantor (in the event of a sale or other
disposition of all of the Capital Stock of such Guarantor) will be released
and relieved of its obligations under its Note Guarantee or the Person
acquiring the property (in the event of a sale or other disposition of all or
substantially all of the assets of such Guarantor) will not be required to
enter into a Note Guarantee; provided, in each case, that such transaction is
carried out pursuant to and in accordance with the covenants described below
under the captions "Repurchase at the Option of Holders--Asset Sales" and
"Certain Covenants--Merger, Consolidation or Sale of Assets."
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to April 1,
2002. Thereafter, the Notes will be subject to redemption at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Additional
Interest, if any, thereon to the applicable redemption date, if redeemed
during the twelve-month period beginning on April 1 of the years indicated
below:
YEAR PERCENTAGE
---- ----------
2002.............................. 105.125%
2003.............................. 103.417%
2004.............................. 101.708%
2005 and thereafter............... 100.000%
Notwithstanding the foregoing, at any time prior to April 1, 2000, the
Company, at its option, may redeem up to 35% of the principal amount of the
Notes originally issued with the net proceeds of one or more Public Equity
Offerings made by the Company or of a capital contribution made by the Parent
to the common equity capital of the Company with the net proceeds of one or
more Public Equity Offerings made by the Parent, at a redemption price of
110.25% of the principal amount thereof plus accrued and unpaid interest and
Additional Interest, if any, to the redemption date; provided, however, that
after such redemption the aggregate principal amount of the Notes outstanding
must equal at least 65% of the aggregate principal amount of the Notes
originally issued and provided, further, that such redemption shall occur
within 60 days of the date of closing of such Public Equity Offering.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis;
provided that no Notes of $1,000 or
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less shall be redeemed in part. Notices of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each Holder of Notes to be redeemed at its registered address. If any Note is
to be redeemed in part only, the notice of redemption that relates to such
Note shall state the portion of the principal amount thereof to be redeemed. A
new Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Note. On and after the redemption date, interest ceases to accrue on Notes or
portions of them called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the principal amount thereof plus accrued and unpaid
interest and Additional Interest thereon (the "Change of Control Purchase
Price") to the date of purchase (the "Change of Control Payment Date"). Within
30 days after the date of any Change of Control, the Company will mail a
notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Notes pursuant to
the procedures required by the Indenture and described in such notice. The
Change of Control Payment Date shall be a business day not less than 30 days
nor more than 60 days after such notice is mailed.
On the Change of Control Payment Date, the Company will (1) accept for
payment all Notes or portions thereof properly tendered pursuant to the Change
of Control Offer, (2) deposit with the Paying Agent an amount equal to the
Change of Control Purchase Price in respect of all Notes or portions thereof
so tendered and (3) deliver or cause to be delivered to the Trustee the Notes
so tendered together with an officers' certificate stating the aggregate
principal amount of Notes or portions thereof being purchased by the Company.
The Paying Agent will promptly mail to each Holder of Notes so tendered the
Change of Control Purchase Price for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each
Holder a new Note equal in principal amount to any unpurchased portion of the
Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders of the Notes to require
that the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring. Although the existence of a
Holder's right to require the Company to repurchase the Notes in respect of a
Change of Control may deter a third party from acquiring the Company in a
transaction that constitutes a Change of Control, the provisions of the
Indenture relating to a Change of Control in and of themselves may not afford
Holders of the Notes protection in the event of a highly leveraged
transaction, reorganization, recapitalization, restructuring, merger or
similar transaction involving the Company that may adversely affect Holders,
if such transaction is not the type of transaction included within the
definition of a Change of Control.
The Credit Agreement provides that certain change of control events with
respect to the Company would constitute a default thereunder permitting
holders of any indebtedness thereunder to exercise remedies, including the
right to seek immediate payment of amounts then owing under the Credit
Agreement.
65
The meaning of the phrase "all or substantially all," as used in the
definition of "Change of Control" with respect to a sale of assets, varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances, there may be a degree
of uncertainty in ascertaining whether a particular transaction would involve
a disposition of "all or substantially all" of the assets of the Company, and
therefore it may be unclear whether a Change of Control has occurred and
whether the Notes are subject to a Change of Control Offer.
Restrictions in the Indenture described herein on the ability of the Company
and its Subsidiaries to incur additional Indebtedness, to grant Liens on its
or their property, to make Restricted Payments and to make Asset Sales may
also make more difficult or discourage a takeover of the Company, whether
favored or opposed by the management of the Company. Consummation of any such
transaction in certain circumstances may require redemption or repurchase of
the Notes, and there can be no assurance that the Company or the acquiring
party will have sufficient financial resources to effect such redemption or
repurchase. In certain circumstances, such restrictions and the restrictions
on transactions with Affiliates may make more difficult or discourage any
leveraged buyout of the Company or any of its Subsidiaries. While such
restrictions cover a variety of arrangements which have traditionally been
used to effect highly leveraged transactions, the Indenture may not afford the
Holders of Notes protection in all circumstances from the adverse aspects of a
highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, engage in an Asset Sale except an
Exempt Asset Sale, as defined below, unless (i) the Company (or such
Subsidiary) receives consideration at the time of such Asset Sale at least
equal to the fair market value of the assets sold or otherwise disposed of,
and in the case of a lease of assets, a lease providing for rent and other
conditions which are no less favorable to the Company (or such Subsidiary) in
any material respect than the then prevailing market conditions (evidenced in
each case by a resolution of the Board of Directors of the Company set forth
in an officers' certificate delivered to the Trustee), and (ii) at least 85%
(100% in the case of lease payments) of the consideration therefor received by
the Company or such Subsidiary is in the form of cash or cash equivalents. An
"Exempt Asset Sale" means an Asset Sale on or after the date of the Indenture,
the Net Proceeds of which, plus the Net Proceeds of all other Asset Sales made
in the same fiscal year (but, in all cases, after the date of the Indenture)
do not exceed $2.5 million.
The Company may apply, and may permit its Subsidiaries to apply, Net
Proceeds of an Asset Sale (other than an Exempt Asset Sale), at its option,
within 180 days after the consummation of such an Asset Sale (a) to
permanently reduce Senior Indebtedness (and to permanently reduce the
commitments, if any, with respect thereto), (b) to acquire Eligible Assets or
to reimburse the Company or its Subsidiaries for expenditures previously made
to acquire Eligible Assets, provided that any such expenditures were made not
more than 180 days prior to the consummation of such Asset Sale and were made
in contemplation of such Asset Sale and for the purpose of replacing the
assets to be disposed of in such Asset Sale, or (c) to reimburse the Company
or its Subsidiaries for expenditures made, and costs incurred, to repair,
rebuild, replace or restore property subject to loss, damage or taking to the
extent that the Net Proceeds consist of insurance proceeds received on account
of such loss, damage or taking. Pending the final application of any such Net
Proceeds, the Company may invest such Net Proceeds temporarily in Cash
Equivalents or apply such Net Proceeds to reduce amounts outstanding under the
Credit Agreement. Any Net Proceeds from Asset Sales (other than Exempt Asset
Sales) that are not applied within 180 days after the consummation of an Asset
Sale as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $5.0 million, the Company will be required to make an offer to all
Holders of Notes (an "Asset Sale Offer") to purchase, on a pro rata basis, the
principal amount of Notes equal in amount to the Excess Proceeds (and not just
the amount thereof that exceeds $5.0 million), at a purchase price in cash in
an amount equal to 100% of the principal amount thereof plus accrued and
unpaid interest and Additional Interest thereon to the date of purchase, in
accordance with the procedures set forth in the Indenture. To the extent that
the aggregate
66
amount of Notes tendered pursuant to an Asset Sale Offer is less than the
amount of Excess Proceeds, the Company may use such deficiency, or a portion
thereof, for general corporate purposes. If the aggregate principal amount of
Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds,
the Trustee shall select the Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero, subject to any subsequent Asset Sale.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Subsidiaries as an entirety to a
Person in a transaction permitted under the caption "Certain Covenants--
Merger, Consolidation or Sale of Assets" below, the successor corporation
shall be deemed to have sold the properties and assets of the Company and its
Subsidiaries not so transferred for purposes of this covenant, and shall
comply with the provisions of this covenant with respect to such deemed sale
as if it were an Asset Sale. In addition, the fair market value of such
properties and assets of the Company or its Subsidiaries deemed to be sold
shall be deemed to be Net Proceeds for purposes of this covenant.
If at any time any non-cash consideration received by the Company or any
Subsidiary in connection with any Asset Sale is converted into or sold or
otherwise disposed of for cash, then such conversion or disposition shall be
deemed to constitute an Asset Sale hereunder and the Net Proceeds thereof
shall be applied in accordance with this covenant.
Notwithstanding the foregoing, the Company will not, and will not permit any
Subsidiary to, directly or indirectly, make any Asset Sale of any of the
Capital Stock of a Subsidiary except pursuant to an Asset Sale of all of the
Capital Stock of such Subsidiary.
The Company will comply with the requirements of Section 14(e) of, and Rule
14e-1 under, the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of the Notes as a result of a Change of Control
or an Asset Sale.
The Company may use Net Proceeds from Exempt Asset Sales for general
corporate purposes (subject to the other provisions of the Indenture).
CERTAIN COVENANTS
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Indebtedness) other than Permitted Indebtedness and that the Company
will not issue any Disqualified Stock and will not permit any of its
Subsidiaries to issue any shares of preferred stock; provided, however, that
the Company may incur Indebtedness (including Acquired Indebtedness) and may
issue Disqualified Stock if: (i) the Fixed Charge Coverage Ratio for the
Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which
such additional Indebtedness is incurred or such Disqualified Stock is issued
would have been at least 2.0 to 1.0 for Indebtedness incurred prior to
September 30, 2000, and 2.5 to 1.0 for Indebtedness incurred thereafter
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or
the Disqualified Stock had been issued, as the case may be, at the beginning
of such four-quarter period; and (ii) no Default or Event of Default shall
have occurred and be continuing or would occur as a consequence thereof.
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend
or make any distribution of any kind or character (whether in cash, securities
or other property) on account of any class of the Company's or any of its
Subsidiaries' Equity Interests
67
or to holders thereof (including, without limitation, any payment to
shareholders of the Company in connection with a merger or consolidation
involving the Company), other than (a) dividends or distributions payable
solely in Equity Interests (other than Disqualified Stock) of the Company or
(b) dividends or distributions payable solely to the Company or any Wholly
Owned Subsidiary of the Company; (ii) purchase, redeem or otherwise acquire or
retire for value any Equity Interests of the Company, any Subsidiary of the
Company, or any other Affiliate of the Company (other than any such Equity
Interests owned by the Company or any Wholly Owned Subsidiary of the Company);
(iii) make any principal payment on, or purchase, redeem, defease or otherwise
acquire or retire for value any Indebtedness of the Company or any Guarantor
that is pari passu with or subordinated to the Notes or the Note Guarantees
prior to any scheduled repayment date, mandatory sinking fund payment date or
final maturity date (other than the Notes), other than through the purchase,
redemption or acquisition by the Company of Indebtedness of the Company or any
of its Subsidiaries through the issuance in exchange therefor of Equity
Interests (other than Disqualified Stock) of the Company; (iv) make any
Investment (other than Permitted Investments) or (v) make any payments to any
Affiliate of the Company as compensation for management services, except
through the issuance of Equity Interests (other than Disqualified Stock) of
the Company (all such payments and other actions set forth in clauses (i)
through (v) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) at the time of such Restricted Payment and after giving pro forma
effect thereto as if such Restricted Payment had been made at the beginning
of the applicable four-quarter period, the Company would have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments declared or made by the Company and its
Subsidiaries on or after the date of the Indenture (excluding Restricted
Payments permitted by clauses (ii), (iii), (iv), (v) and (vi) of the second
sentence of the next succeeding paragraph), is less than the sum of (i) 50%
of the Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company from
the issue or sale after the date of the Indenture of Equity Interests of
the Company or of debt securities of the Company that have been converted
into such Equity Interests (other than Equity Interests (or convertible
debt securities) sold to a Subsidiary of the Company and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock).
The foregoing clauses (b) and (c) will not prohibit (i) the payment of any
dividend on any class of Capital Stock of the Company or any Subsidiary of the
Company within 60 days after the date of declaration thereof, if on the date
on which such dividend was declared such payment would have complied with the
provisions of the Indenture; (ii) any dividend on shares of Capital Stock
payable solely in shares of Capital Stock (other than Disqualified Stock);
(iii) any dividend or other distribution payable from a Subsidiary to the
Company or any Wholly-Owned Subsidiary; (iv) the making of any Investment in
exchange for, or out of the proceeds of, the substantially concurrent sale
(other than to a Subsidiary of the Company) of Equity Interests of the Company
(other than Disqualified Stock); provided, that any net cash proceeds that are
utilized for any such Investment, and any Net Income resulting therefrom,
shall be excluded from clause (c) of the preceding paragraph; (v) the
redemption, repurchase, retirement or other acquisition of any Equity
Interests of the Company in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to a Subsidiary of the Company) of
other Equity Interests of the Company (other than any Disqualified Stock);
provided that any net cash proceeds that are utilized for any such redemption,
repurchase, retirement or other acquisition, and any Net Income resulting
therefrom, shall be excluded from clause (c) of the preceding paragraph; (vi)
the defeasance, redemption or
68
repurchase of pari passu or subordinated Indebtedness with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness or the
substantially concurrent sale (other than to a Subsidiary of the Company) of
Equity Interests of the Company (other than Disqualified Stock); provided,
that any net cash proceeds that are utilized for any such defeasance,
redemption or repurchase, and any Net Income resulting therefrom, shall be
excluded from clause (c) of the preceding paragraph and (vii) the repurchase
of shares of Capital Stock of the Company in connection with repurchase
provisions under employee stock option and stock purchase agreements or other
agreements to compensate management employees of the Company to the extent
such payments do not exceed $1.0 million in the aggregate.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an officers' certificate delivered to the Trustee) on the date of the
Restricted Payment of the asset(s) proposed to be transferred by the Company
or such Subsidiary, as the case may be, pursuant to the Restricted Payment.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant described under this caption were computed, which
calculations may be based upon the Company's latest available financial
statements.
LIENS
The Indenture provides that, unless the Notes and the Note Guarantees are
equally and ratably secured, the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien on any of its assets, now owned or hereafter acquired,
securing any Indebtedness other than Permitted Liens; provided that, if such
Indebtedness is by its terms expressly subordinate to the Notes or the Note
Guarantees, the Lien securing such subordinate or junior Indebtedness shall be
subordinate and junior to the Lien securing the Notes or the Note Guarantees
with the same relative priority as such subordinated or junior Indebtedness
shall have with respect to the Notes or the Note Guarantees.
SALE AND LEASEBACK TRANSACTIONS
The Indenture provides that the Company will not, and will not cause or
permit any of its Subsidiaries to, enter into any Sale and Leaseback
Transaction. Notwithstanding the foregoing, the Company or any Subsidiary may
enter into a Sale and Leaseback Transaction if: (i) after giving pro forma
effect to any such Sale and Leaseback Transaction, the Company shall be in
compliance with the covenants described under the captions "--Incurrence of
Indebtedness and Issuance of Preferred Stock" and "--Liens" above; (ii) the
gross cash proceeds of such Sale and Leaseback Transaction are at least equal
to the fair market value of such property (as determined by the Board, whose
determination shall be conclusive if made in good faith and evidenced by a
Board Resolution); (iii) the aggregate rent payable by the Company in respect
of such Sale and Leaseback Transaction is not in excess of the fair market
rental value of the property leased pursuant to such Sale and Leaseback
Transaction; and (iv) the Company shall apply the net cash proceeds of the
sale as provided under "Repurchase at the Option of Holders--Asset Sales"
above, to the extent required therein.
OWNERSHIP OF AND LIENS ON CAPITAL STOCK
The Indenture provides that the Company (i) will not permit any Person
(other than the Company or any Wholly Owned Subsidiary of the Company) to own
any Capital Stock of any Subsidiary of the Company, and (ii) will not permit
any Subsidiary of the Company to issue Capital Stock (except to the Company or
to a Wholly Owned Subsidiary) or create, incur, assume or suffer to exist any
Lien thereon, in each case except (a) directors' qualifying shares, (b)
Capital Stock issued prior to the time such Person became a Subsidiary of the
Company, provided that such Capital Stock was not issued in anticipation of
such transaction, (c) if such Subsidiary merges with another Subsidiary of the
Company, (d) if such Subsidiary ceases to be a Subsidiary of the Company (as a
result of the sale of 100% of the shares of such Subsidiary, the Net Proceeds
from which are applied in accordance with "Repurchase at the Option of
Holders--Asset Sales"), (e) Liens on Capital Stock of any Subsidiary of the
Company to secure Indebtedness incurred under the Credit Agreement or (f)
Liens on
69
Capital Stock of any Subsidiary of the Company granted in accordance with the
provisions of the Indenture described above in the first sentence under the
caption "Liens."
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary of the Company to
(i) pay dividends or make any other distributions to the Company or any
of its Subsidiaries on its Capital Stock or with respect to any other
interest or participation in, or measured by, its profits;
(ii)pay any Indebtedness or other obligation owed to the Company or any
of its Subsidiaries;
(iii)make loans or advances to the Company or any of its Subsidiaries;
(iv)sell, lease or transfer any of its properties or assets to the
Company or any of its Subsidiaries; or
(v)grant liens or security interests on its assets in favor of the
Holders of Notes; or
(vi)guarantee the obligations of the Company evidenced by the Notes or
any renewals, refinancings, exchanges, refundings or extensions thereof
except for such encumbrances or restrictions existing under or by reason of
(A) the Indenture and the Notes, (B) the Credit Agreement as in effect on the
Closing Date, (C) applicable law, (D) any instrument governing Acquired
Indebtedness or Capital Stock of a Person acquired by the Company or any of
its Subsidiaries as in effect at the time of such acquisition (except to the
extent such Acquired Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so acquired,
provided that the Consolidated EBITDA of such Person is not taken into account
in determining whether such acquisition was permitted by the terms of the
Indenture, (E) any document or instrument governing Indebtedness incurred
pursuant to clause (iii) of the definition of Permitted Indebtedness, provided
that any such restriction contained therein relates only to the asset or
assets constructed or acquired in connection therewith, or (F) Permitted
Refinancing Indebtedness of Indebtedness described in clause (B) and clause
(D) hereof, provided that the provisions relating to such encumbrances or
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced.
LIMITATION ON LAYERING DEBT
Neither the Company nor any Subsidiary may, directly or indirectly, in any
event Incur any Indebtedness which by its terms (or by the terms of any
agreement governing such Indebtedness) is expressly subordinated to any other
Indebtedness of the Company or such Subsidiary, as the case may be, unless
such Indebtedness is also by its terms (or by the terms of any agreement
governing such Indebtedness) made expressly subordinate to the Notes to the
same extent and in the same manner, and so long as, such Indebtedness is
subordinated pursuant to subordination provisions that are no more favorable
to the holders of any other Indebtedness of the Company or such Subsidiary, as
the case may be.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that the Company will not, and will not permit any
Subsidiary of the Company to, in a single transaction or series of related
transactions, consolidate or merge with or into (other than the consolidation
or merger of a Wholly Owned Subsidiary of the Company with another Wholly
Owned Subsidiary of the Company or into the Company) (whether or not the
Company or such Subsidiary is the surviving corporation), or directly and/or
indirectly through its Subsidiaries sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the properties or assets of
the Company and its Subsidiaries (determined on
70
a consolidated basis for the Company and its Subsidiaries taken as a whole) in
one or more related transactions to, another corporation, Person or entity
unless
(i) either (a) the Company, in the case of a transaction involving the
Company, or such Subsidiary, in the case of a transaction involving a
Subsidiary of the Company, is the surviving corporation or (b) in the case
of a transaction involving the Company or a Guarantor, the entity or the
Person formed by or surviving any such consolidation or merger (if other
than the Company or such Guarantor) or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made is a
corporation organized or existing under the laws of the United States of
America, any state thereof or the District of Columbia and expressly
assumes all the obligations of the Company under the Notes and the
Indenture or such Guarantor under the relevant Note Guarantee and the
Indenture, as the case may be, pursuant to a supplemental indenture in a
form reasonably satisfactory to the Trustee;
(ii) immediately prior to or after such transaction no Default or Event
of Default shall have occurred and/or be continuing;
(iii) in the case of a transaction involving the Company, the Company or,
if other than the Company, the entity or Person formed by or surviving any
such consolidation or merger, or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made (A) will have
Consolidated Net Worth immediately after the transaction equal to or
greater than the Consolidated Net Worth of the Company immediately
preceding the transaction, and (B) will, at the time of such transaction
and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock;"
(iv) if, as a result of any such transaction, property or assets of the
Company or a Guarantor would become subject to a Lien securing Indebtedness
not excepted from the provisions of the Indenture described above under the
caption "--Liens," the Company, any such Guarantor or the surviving entity,
as the case may be, shall have secured the Notes and the relevant Note
Guarantee, as required by such provisions; and
(v) the Company shall have delivered to the Trustee an officers'
certificate and, except in the case of a merger of a Subsidiary of the
Company into the Company or into a Wholly Owned Subsidiary of the Company,
an opinion of counsel, each stating that such consolidation, merger,
conveyance, lease or disposition and any supplemental indenture with
respect thereto, comply with all of the terms of this covenant and that all
conditions precedent provided for in this provision relating to such
transaction or series of transactions have been complied with.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Subsidiaries of
the Company the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer
of all or substantially all of the properties and assets of the Company.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, enter into or suffer to exist any transaction or series
of related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services), with any Affiliate (each
of the foregoing, an "Affiliate Transaction"), other than Exempt Affiliate
Transactions, unless (a) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Subsidiary than would be
obtained in a comparable transaction with a Person that is not an Affiliate
and (b) (i) with respect to a transaction or series of transactions involving
aggregate consideration in excess of $2.5 million, a committee of independent
Directors of the Company shall approve by resolution certifying that such
transaction or series of transactions comply with the clause (a) above, and
(ii) with respect to a transaction or series of transactions involving
aggregate consideration
71
equal to or greater than $10.0 million, the Company receives a written opinion
from a nationally recognized investment bank that such transaction or series
of transactions is fair to the Company from a financial point of view.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company will furnish to the Holders of Notes and file with the Trustee, within
15 days after it is or would have been required to file such with the
Commission, all information, documents and reports specified in Section 13 and
Section 15(d) of the Exchange Act. In addition, whether or not required by the
rules and regulations of the Commission, the Company will file a copy of all
such information, documents and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make
such information available to securities analysts and prospective investors.
In addition, the Company has agreed that, for so long as any Notes remain
outstanding, it will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information specified in Rule
144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Additional Interest with respect to, the Notes; (ii) default in the payment
when due of the principal of or premium, if any, on the Notes; (iii) failure
by the Company to comply with the provisions described under the captions
"Repurchase at Option of Holders--Change of Control," "Repurchase at Option of
Holders--Asset Sales," "--Ownership of and Liens on Capital Stock," "--
Restricted Payments," "--Incurrence of Indebtedness and Issuance of Preferred
Stock" or "--Merger, Consolidation or Sale of Assets"; (iv) failure by the
Company to comply with any of its other agreements or covenants in the
Indenture or the Notes for 30 days after written notice by the Trustee or
Holders of at least 25% of the aggregate principal amount of the Notes
outstanding; (v) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the
date of the Indenture, which default (a) is caused by a failure to pay
principal of such Indebtedness at final maturity thereof (after giving effect
to applicable grace periods) (a "Payment Default") or (b) results in the
acceleration of such Indebtedness prior to its express maturity and, in each
case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness as to which there has been a
Payment Default or the maturity of which has been so accelerated, exceeds in
the aggregate $5.0 million; (vi) failure by the Company or any of its
Subsidiaries to pay final judgments (not covered by insurance) which exceed in
the aggregate $5.0 million, which judgments are not paid, discharged or stayed
for a period of 60 days; (vii) certain events of bankruptcy, insolvency or
reorganization with respect to the Company or any of its Subsidiaries; and
(viii) the Note Guarantee of any Guarantor is held in any judicial proceeding
to be unenforceable or invalid or ceases for any reason to be in full force
and effect (other than in accordance with the terms of the Indenture) or any
Guarantor or any Person acting on behalf of any Guarantor denies or disaffirms
such Guarantor's obligations under its Note Guarantee (other than by reason of
a release of such Guarantor from its Note Guarantee in accordance with the
terms of the Indenture).
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount of all of the then outstanding
Notes may declare all the Notes to be due and payable immediately in an amount
equal to the principal amount of the Notes, together with accrued interest to
the date the Notes become due and payable. After such acceleration, but before
a judgment or decree based on acceleration, the Holders of a majority in
aggregate principal amount of outstanding Notes may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than the non-payment of principal, interest, premium or Additional
Interest that have become due solely because of such acceleration,
72
have been cured or waived as provided in the Indenture. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to the Company or any Subsidiary of the
Company, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Indenture
provides that if a Default occurs and is continuing, generally the Trustee
must give notice of such Default to the Holders within 90 days after the
occurrence of such Default. The Trustee may withhold from Holders of the Notes
notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or premium, if any, or
interest or Additional Interest) if it determines that withholding notice is
in their interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of interest or premium or Additional Interest on, or the principal of,
any Note (except a payment default resulting from an acceleration that has
been rescinded) or in respect of a provision that cannot be amended or waived
without the consent of the Holder affected. See "Amendment, Supplement and
Waiver."
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and upon becoming aware of any
Default or Event of Default, the Company is required to deliver to the Trustee
a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. No director, officer, employee,
incorporator or stockholder of any Guarantor, as such, shall have any
liability for any obligations of such Guarantor under its Note Guarantee or
the Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes and the Note Guarantees. Such waiver
may not be effective to waive liabilities under the Federal securities laws
and it is the view of the Commission that such waiver is against public
policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
At its option and at any time, the Company may elect to have all of the
obligations of the Company and the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance") except for (i) the rights of Holders of
outstanding Notes to receive payments in respect of the principal of, premium,
if any, and interest and Additional Interest on such Notes when such payments
are due from the trust referred to below, (ii) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of
Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the Company's obligations under the Registration Rights Agreement,
(iv) the rights, powers, trusts, duties and immunities of the Trustee, and the
Company's obligations in connection therewith and (v) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its option and
at any time, elect to have the obligations of the Company released with
respect to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Notes. In the
event Covenant Defeasance occurs, certain events (not including nonpayment,
bankruptcy and insolvency events) described under "Events of Default" will no
longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, U.S.
73
Government Obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest and
Additional Interest on the outstanding Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Company must specify
whether the Notes are being defeased to maturity or to a particular redemption
date; (ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from,
or there has been published by, the Internal Revenue Service a ruling or (B)
since the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the Holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax purposes
as a result of such Legal Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of
funds (or the granting of a Lien as security therefor) to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 123rd day after the
date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default under the Credit
Agreement or any other material agreement or instrument (other than the
Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
deliver to the Trustee an officers' certificate stating that the deposit was
not made by the Company with the intent of preferring the Holders of Notes
over other creditors of the Company or the Guarantors or with the intent of
defeating, hindering, delaying or defrauding creditors of the Company, the
Guarantors or others; (vii) such Legal Defeasance or Covenant Defeasance shall
not result in the trust arising from such deposit constituting an investment
company within the meaning of the Investment Company Act of 1940, as amended,
unless such trust shall be registered under such Act or exempt from
registration thereunder; and (viii) the Company must deliver to the Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent relating to Legal Defeasance or Covenant Defeasance, as
the case may be, have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Trustee will act as paying agent and registrar for the Notes. The Company,
the registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents as well as
certifications, legal opinions and other information and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in aggregate principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange
offer for the Notes), and any existing default or failure to comply with any
provision of the Indenture or the Notes may be waived (other than a payment
default) with the consent of the Holders of a majority in aggregate principal
amount of the
74
then outstanding Notes (including consents obtained in connection with a
tender offer or exchange offer for the Notes).
Without the consent of each Holder, an amendment or waiver may not: (i)
reduce the principal amount of Notes whose Holders must consent to an
amendment, supplement or waiver, (ii) reduce the principal of or premium on or
change the fixed maturity of any Note or alter the provisions with respect to
the redemption of the Notes (other than provisions relating to the covenants
described above under the caption "--Repurchase at the Option of Holders"),
(iii) reduce the rate of or change the time for payment of interest on any
Note, (iv) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest or Additional Interest on the Notes (except a
rescission of acceleration of the Notes by the Holders of at least a majority
in aggregate principal amount of the then outstanding Notes and a waiver of
the payment default that resulted from such acceleration), (v) make any Note
payable in money other than that stated in the Notes, (vi) make any change in
the provisions of the Indenture relating to waivers of past Defaults or the
rights of Holders of Notes to receive payments of principal or premium, if
any, or interest or Additional Interest on the Notes, (vii) waive a redemption
payment with respect to any Note (other than a payment required by one of the
covenants described above under the caption "--Repurchase at the Option of
Holders"), (viii) modify the ranking or priority of the Notes or the Note
Guarantee of any Guarantor, (ix) release any Guarantor from any of its
obligations under its Note Guarantee or the Indenture other than in accordance
with the terms of the Indenture or (x) make any change in the foregoing
amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of Certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect
the interests of the Holders of the Notes in any material respect, or to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
PAYMENTS FOR CONSENT
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any Holder of any Notes for or as an inducement
to any consent, waiver or amendment of any terms or provisions of the Notes,
unless such consideration is offered to be paid or agreed to be paid to all
Holders of the Notes which so consent, waive or agree to amend in the time
frame set forth in the solicitation documents relating to such consent, waiver
or agreement.
CONCERNING THE TRUSTEE
SunTrust Bank, Atlanta is the Trustee under the Indenture. The Trustee's
current address is 58 Edgewood Avenue, 4th Floor Annex, Atlanta, Georgia
30303.
The Indenture contains certain limitations on the rights of the Trustee, if
it becomes a creditor of the Company, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The Trustee is permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined in
the Trust Indenture Act) it must eliminate such conflict or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not have been cured), the Trustee will be required,
in the exercise of its power, to use the degree of care of a prudent man in
the conduct of his own affairs. Subject to such provisions, the Trustee will
be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
75
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to the Company at One
Union Square, Chattanooga, Tennessee 37402, Attn: Treasurer.
BOOK-ENTRY, DELIVERY AND FORM
The Private Notes were issued in the form of one global certificate (the
"Private Global Certificate") for QIBS. The Exchange Notes will initially be
issued in the form of one or more global certificates (collectively, the
"Exchange Global Notes"). The Private Global Note was deposited on the date of
the closing of the sale of the Private Notes and the Exchange Global Notes
will be deposited on the date of the closing of the Exchange Offer with, or on
behalf of, The Depository Trust Company (the "Depositary") and registered in
the name of Cede & Co., as nominee of the Depositary (such nominee being
referred to herein as the "Global Note Holder"). The term "Global Notes" means
the Private Global Notes or the Exchange Global Notes, as the context may
require.
Exchange Notes to be held by institutional "accredited investors" who are
not "qualified institutional buyers" (as such terms are defined under
"Transfer Restrictions" elsewhere herein (the "Non-Global Purchasers")) or
(ii) issued as described below under "Certificated Notes" will be issued in
registered, definitive, certificated form (the "Certificated Notes"). Upon the
transfer to a qualified institutional buyer of Certificated Notes initially
issued to a Non-Global Purchaser, such Certificated Notes may, unless the
Global Note has previously been exchanged for Certificated Notes, be exchanged
for an interest in the Global Note representing the principal amount of the
Notes being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants" or the "Depositary's Indirect Participants") that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Initial Purchasers with portions of
the principal amount of the Global Note and (ii) ownership of the Notes
evidenced by the Global Note will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to own, transfer or pledge Notes evidenced
by the Global Note will be limited to such extent. For certain other
restrictions on the transferability of the Notes, see "Transfer Restrictions."
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of
any Notes evidenced by the Global Note. Beneficial owners of Notes evidenced
by the Global Note will not be considered the owners or Holders thereof under
the Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any
aspect of the records of the Depositary or for maintaining, supervising or
reviewing any records of the Depositary relating to the Notes.
76
Payments in respect of the principal of, premium, if any, interest and
Additional Interest, if any, on any Notes registered in the name of the Global
Note Holder on the applicable record date will be payable by the Trustee to or
at the direction of the Global Note Holder in its capacity as the registered
Holder under the Indenture. Under the terms of the Indenture, the Company and
the Trustee may treat the persons in whose names Notes, including the Global
Note, are registered as the owners thereof for the purpose of receiving such
payments. Consequently, neither the Company nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of Notes. The Company believes, however, that it is currently the
policy of the Depositary to immediately credit the accounts of the relevant
Participants with such payments, in amounts proportionate to their respective
holdings of beneficial interests in the relevant security as shown on the
records of the Depositary. Payments by the Depositary's Participants and the
Depositary's Indirect Participants to the beneficial owners of Notes will be
governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
CERTIFICATED NOTES
Transferees of Exchange Notes who are not "qualified institutional buyers"
as defined in Rule 144A under the Securities Act may hold Notes only in the
form of Certificated Notes. All such Certificated Notes would be subject to
the legend requirements described herein under "Transfer Restrictions." In
addition, if (i) the Company notifies the Trustee in writing that the
Depositary is no longer willing or able to act as a depositary and the Company
is unable to locate a qualified successor within 90 days or (ii) the Company,
at its option, notifies the Trustee in writing that it elects to change the
issuance of Notes in the form of Certificated Securities under the Indenture
then, upon surrender by the Global Note Holder of its Global Note,
Certificated Notes will be issued to each person that the Global Note Holder
and the Depositary identify as being the beneficial owner of the related
Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, interest and Additional
Interest, if any) be made by wire transfer of immediately available funds to
the accounts specified by the Global Note Holder. With respect to Certificated
Notes, the Company will make all payments of principal, premium, if any,
interest and Additional Interest, if any, by wire transfer of immediately
available funds to the accounts specified by the Holders thereof or, if no
such account is specified, by mailing a check to each such Holder's registered
address. Secondary trading in long-term notes and debentures of corporate
issuers is generally settled in clearing-house or next-day funds. In contrast,
the Notes represented by the Global Note are expected to be eligible to trade
in the PORTAL market and to trade in the Depositary's Same-Day Funds
Settlement System, and any permitted secondary market trading activity in such
Notes will, therefore, be required by the Depositary to be settled in
immediately available funds. The Company expects that secondary trading in the
Certificated Notes will also be settled in immediately available funds.
REGISTRATION RIGHTS; ADDITIONAL INTEREST
The Company and the Initial Purchaser entered into the Registration Rights
Agreement on September 26, 1997 (the "Registration Rights Agreement").
Pursuant to the Registration Rights Agreement, the Company agreed, for the
benefit of the Holders of the Notes, at the Company's expense, to (i) file
within 60 days after the date of original issuance of the Notes a registration
statement (the "Exchange Offer Registration Statement") with the Commission
with respect to a registered offer to exchange the Private Notes for the
Exchange Notes to be issued under the Indenture or a substantially similar
indenture in the same aggregate principal amount as and with terms that will
be identical in all respects to the Private Notes (except that the Additional
Interest provisions
77
and transfer restrictions will be modified or eliminated, as appropriate),
(ii) use its best efforts to cause the Exchange Offer Registration Statement
to be declared effective under the Securities Act within 150 days after the
date of original issuance of the Notes and (iii) use its best efforts to
consummate the Exchange Offer within 180 days after the date of original
issuance of the Notes. Promptly after the Exchange Offer Registration
Statement has been declared effective, the Company will offer the Exchange
Notes in exchange for surrender of the Private Notes (the "Exchange Offer").
The Company will keep the Exchange Offer open for not less than 30 days and
not more than 45 days (or longer if required by applicable law) after the date
notice of the Exchange Offer is mailed to the Holders of the Private Notes.
For each Private Note tendered to the Company pursuant to the Exchange Offer
and not validly withdrawn by the Holder thereof, the Holder of such Private
Note will receive an Exchange Note having a principal amount equal to the
principal amount of such surrendered Note.
Based on existing interpretations of the Securities Act by the staff of the
Commission set forth in several no-action letters to third parties, and
subject to the immediately following sentence, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the
Private Notes may be offered for resale, resold and otherwise transferred by
the Holders thereof (other than (i) a broker-dealer who purchased such Private
Notes directly from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act, or (ii) a person that is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
requirements of the Securities Act; provided that the holder is acquiring
Exchange Notes in the ordinary course of its business and is not
participating, does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of the
Exchange Notes. Holders of Private Notes wishing to accept the Exchange Offer
must represent to the Company that such conditions have been met. Each broker-
dealer that receives Exchange Notes for its own account in exchange for
Private Notes, where such Private Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes. The
Commission has taken the position that Exchanging Dealers may fulfill their
prospectus delivery requirements with respect to the Exchange Notes (other
than a resale of an unsold allotment from the original sale of the Notes) with
the prospectus contained in the Exchange Offer Registration Statement. Under
the Registration Rights Agreement, the Company is required to allow Exchanging
Dealers to use the prospectus contained in the Exchange Offer Registration
Statement in connection with the resale of such Exchange Notes.
In the event that any changes in law or applicable interpretations of the
staff of the Commission do not permit the Company to effect the Exchange
Offer, or if for any reason the Exchange Offer is not consummated within 180
days after the date of original issuance of the Private Notes or in certain
other circumstances, the Company will, at its expense, (i) as promptly as
practicable, and in any event on or prior to 60 days after such filing
obligation arises, file with the Commission a shelf registration statement
(the "Shelf Registration Statement") covering resales of the Notes, (ii) use
its best efforts to cause the Shelf Registration Statement to be declared
effective under the Securities Act on or prior to 45 days after such filing
occurs and (iii) keep effective the Shelf Registration Statement until two
years after its effective date (or such shorter period that will terminate
when all the Notes covered thereby have been sold pursuant thereto or in
certain other circumstances). The Company will, in the event of the filing of
a Shelf Registration Statement, provide to each Holder of the Notes covered by
the Shelf Registration Statement copies of the prospectus that is a part of
the Shelf Registration Statement, notify each such Holder when the Shelf
Registration Statement for the Notes has become effective and take certain
other actions as are required to permit unrestricted resales of the Notes. A
Holder of Notes that sells such Notes pursuant to the Shelf Registration
Statement generally will be required to be named as a selling securityholder
in the related prospectus and to deliver a prospectus to the purchaser, will
be subject to certain of the civil liability provisions under the Securities
Act in connection with such sales and will be bound by the provisions of the
Registration Rights Agreement that are applicable to such Holder (including
certain indemnification obligations). In addition, each Holder of the Notes
will be required to deliver certain information to be used in connection with
the Shelf Registration Statement in order to have its Notes included in the
Shelf Registration. If (a) the Company fails to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of such Registration Statements is not
78
declared effective by the Commission on or prior to the date specified for
such effectiveness (the "Effectiveness Target Date"), (c) the Company fails to
consummate the Exchange Offer within 30 days of the Effectiveness Target Date
with respect to the Exchange Offer Registration Statement or (d) the Shelf
Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above, a "Registration Default"), then the Company
will pay liquidated damages ("Additional Interest") to each Holder of Notes,
with respect to the first 90-day period immediately following the occurrence
of such Registration Default in an amount equal to 0.5% per annum of the
principal amount of Notes held by such Holder. The amount of the Additional
Interest for such Registration Default will increase by an additional 0.5% per
annum for each subsequent 90-day period until such Registration Default has
been cured, up to an aggregate maximum amount of Additional Interest of 1.0%
per annum for all Registration Defaults. All accrued Additional Interest will
be paid by the Company on each interest payment date with respect to the
Notes. Following the cure of all Registration Defaults, the accrual of
Additional Interest will cease and all accrued and unpaid Additional Interest
shall be paid promptly thereafter.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is qualified in its entirety by
reference to the Registration Rights Agreement, a copy of which is available
as set forth under "Additional Information."
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person, (i) any
Indebtedness or Disqualified Stock of any other Person existing at the time
such other Person is merged with or into or becomes a Subsidiary of such
specified Person, including, without limitation, Indebtedness incurred in
connection with, or in contemplation of, such other Person merging with or
into or becoming a Subsidiary of such specified Person, and (ii) Indebtedness
secured by a Lien encumbering any asset acquired by such specified Person, and
in either case for purposes of the Indenture shall be deemed to be incurred by
such specified Person at the time such other Person is merged with or into or
becomes a Subsidiary of such specified Person or at the time such asset is
acquired by such specified Person, as the case may be.
"Additional Interest" has the meaning ascribed to such term under the
caption "Registration Rights; Additional Interest".
"Affiliate" of any specified Person means (i) any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any other Person who is a director
or executive officer of (a) such specified Person or (b) any Person described
in the preceding clause (i). For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of any class, or any series
of any class, of equity securities of a Person, whether or not voting, shall
be deemed to be control.
"Agent Bank" means SunTrust Bank, Atlanta and its successors under the
Credit Agreement.
"Asset Sale" means with respect to any Person, the sale, lease, conveyance
or other disposition, that does not constitute a Restricted Payment or an
Investment, by such Person of any of its assets (including, without
limitation, by way of a Sale and Leaseback Transaction and including the
issuance, sale or transfer of any Equity Interests in any Subsidiary of the
Company) other than to the Company (including the receipt of proceeds of
79
insurance paid on account of the loss of or damage to any asset and awards of
compensation for any asset taken by condemnation, eminent domain or similar
proceeding, and including the receipt of proceeds of business interruption
insurance), in each case, in one or a series of related transactions;
provided, that notwithstanding the foregoing, the term "Asset Sale" shall not
include: (a) the sale, lease, conveyance, disposition or other transfer of all
or substantially all of the assets of the Company, in accordance with the
terms of the covenant described under the caption "Certain Covenants--Merger,
Consolidation or Sale of Assets," (b) the sale or lease of equipment,
inventory, accounts receivable or other assets in the ordinary course of
business consistent with past practice, (c) a transfer of assets by the
Company to a Wholly Owned Subsidiary of the Company or by a Wholly Owned
Subsidiary of the Company to the Company or to another Wholly Owned Subsidiary
of the Company, (d) an issuance of Equity Interests by a Wholly Owned
Subsidiary of the Company to the Company or to another Wholly Owned Subsidiary
of the Company, (e) the issuance by the Company of shares of its Capital
Stock, or (f) the sale or other disposition of cash or Cash Equivalents.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, capital stock, (ii)
in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
capital stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Change of Control" means such time as either:
(i) prior to an initial Public Equity Offering by the Company or the
Parent of its common stock, the Permitted Shareholders cease to be,
directly or indirectly, the beneficial owners, in the aggregate, of more
than 50% of the voting power of the Voting Stock of the Company or of the
Parent, in each case on a fully-diluted basis, after giving effect to the
conversion and exercise of all outstanding warrants, options and other
securities of the Company or the Parent, as the case may be, convertible
into or exercisable for Voting Stock of the Company or the Parent, as the
case may be (whether or not such securities are then currently convertible
or exercisable); or
(ii) after an initial Public Equity Offering by the Company or the Parent
of its common stock, (a) any "person" or "group" (within the meaning of
Section 13(d) or 14(d) of the Exchange Act) (other than one or more of the
Permitted Shareholders) has become, directly or indirectly, the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a Person shall be deemed to have "beneficial ownership" of all shares
that any such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), by way of
merger, consolidation or otherwise, of 35% or more of the voting power of
the Voting Stock of the Company or the Parent in each case on a fully-
diluted basis, after giving effect to the conversion and exercise of all
outstanding warrants, options and other securities of the Company or the
Parent, as the case may be, convertible into or exercisable for Voting
Stock of the Company or the Parent, as the case may be (whether or not such
securities are then currently convertible or exercisable) and (b) such
person or group is or becomes, directly or indirectly, the beneficial owner
of a greater percentage of the voting power of the Voting Stock of the
Company or of the Parent, as the case may be, calculated on such fully-
diluted basis, than the percentage beneficially owned by the Permitted
Shareholders; or
(iii) the Company or the Parent merges with or into another Person or
sells, assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person merges with or
into the Company or the Parent, in any such event pursuant to a transaction
in which the outstanding Voting Stock of the Company or the Parent is
converted into or exchanged for cash, securities or other property, other
than any such transaction where (x) the outstanding Voting Stock of the
Company or the Parent is converted into or exchanged for (1) Voting Stock
(other than Disqualified Stock) of the surviving
80
or transferee corporation and/or (2) cash, securities and other property in
an amount which could be paid by the Company as a Restricted Payment under
the Indenture and (y) immediately after such transaction no "person" or
"group" (within the meaning of Section 13(d) and 14(d) of the Exchange Act)
(other than one or more of the Permitted Shareholders) is the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a Person shall be deemed to have "beneficial ownership" of all shares
that any such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of (1) 35% or more of the voting power of the Voting Stock of
the surviving or transferee corporation on a fully diluted basis, after
giving effect to the conversion and exercise of all outstanding warrants,
options and other securities of such surviving or transferee corporation,
convertible into or exercisable for Voting Stock of such surviving or
transferee corporation (whether or not such securities are then currently
convertible or exercisable) and (2) a greater percentage of the voting
power of the Voting Stock of such surviving or transferee corporation
calculated on such fully diluted basis, than the percentage then
beneficially owned by the Permitted Shareholders; or
(iv) during any period of two consecutive calendar years, individuals who
at the beginning of such period constituted either the board of directors
of the Company or of the Parent, as the case may be, together with any new
members of such board of directors (a) whose election by such board of
directors or whose nomination for election by the stockholders of the
Company or the stockholders of the Parent, as the case may be, was approved
by a vote of a majority of the members of such board of directors then
still in office who either were directors at the beginning of such period
or whose election or nomination for election was previously so approved or
(b) elected by the Permitted Shareholders, cease for any reason to
constitute a majority of the directors of the Company or of the Parent, as
the case may be, then in office.
"Consolidated EBITDA" means, with respect to any Person for any period, the
sum of, without duplication, (i) the Consolidated Net Income of such Person
and its Subsidiaries for such period, plus (ii) the Fixed Charges for such
period, plus (iii) amortization of deferred financing charges for such period,
plus (iv) provision for taxes based on income or profits for such period (to
the extent such income or profits were included in computing Consolidated Net
Income for such period), plus (v) consolidated depreciation, amortization and
other noncash charges of such Person and its Subsidiaries required to be
reflected as expenses on the books and records of such Person, minus (vi) cash
payments with respect to any nonrecurring, noncash charges previously added
back pursuant to clause (v), and excluding (vii) the impact of foreign
currency translations. Notwithstanding the foregoing, the provision for taxes
based on the income or profits of, and the depreciation and amortization and
other noncash charges of, a Subsidiary of a Person shall be added to
Consolidated Net Income to compute Consolidated EBITDA only to the extent (and
in the same proportion) that the Net Income of such Subsidiary was included in
calculating the Consolidated Net Income of such Person and only if a
corresponding amount would be permitted at the date of determination to be
dividended to such Person by such Subsidiary without any prior governmental
approval (that has not been obtained), and without direct or indirect
restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary
or that is accounted for by the equity method of accounting shall be included
only to the extent of the amount of dividends or distributions paid in cash to
the referent Person or a Wholly Owned Subsidiary thereof, (ii) the Net Income
of any Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to that Subsidiary or its stockholders, (iii) the Net Income of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded, and (iv) the cumulative effect
of a change in accounting principles shall be excluded.
81
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups subsequent to the date of the Indenture in the book value of any
asset owned by such Person or a consolidated Subsidiary of such Person (other
than purchase accounting adjustments made, in connection with any acquisition
of any entity that becomes a consolidated Subsidiary of such Person after the
date of the Indenture, to the book value of the assets of such entity), (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and
(z) all unamortized debt discount and expense and unamortized deferred charges
as of such date, all of the foregoing determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Tangible Assets" means, with respect to any Person, the
total amount of assets of such Person and its Subsidiaries (less applicable
depreciation, amortization and other valuable reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in accordance with GAAP), after deducting
therefrom all goodwill, copyrights, customer lists, tradenames, trademarks,
patents, unamortized debt discount and expense and other like intangibles, all
as set forth on the most recently available consolidated balance sheet of the
Person and its consolidated Subsidiaries, prepared in accordance with GAAP.
"Credit Agreement" means that certain Credit Agreement, dated as of
September 26, 1997 by and among the Company and SunTrust Bank, Atlanta, as
agent, and the lenders parties thereto, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, increased,
renewed, refunded, replaced, restated or refinanced in whole or in part from
time to time.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means (a) with respect to any Person, Capital Stock of
such Person that, by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable), or upon the happening of any
event matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the Holder thereof,
in whole or in part, on or prior to the date which is one year after the date
on which the Notes mature and (b) with respect to any Subsidiary of such
Person (including with respect to any Subsidiary of the Company), any Capital
Stock.
"Eligible Assets" means another business or any substantial part of another
business or other long-term assets (including, without limitation, new
restaurant locations), in each case, in, or used or useful in, the same or a
similar line of business as the Company (exclusive of Krystal Aviation Co. and
Krystal Aviation Management Co.) was engaged in on the date of the Indenture
or any reasonable extensions or expansions thereof (including the Capital
Stock of another Person engaged in such business, provided such other Person
is, or immediately after giving effect to any such acquisition shall become, a
Wholly Owned Subsidiary of the Company).
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock), whether outstanding
prior to, on or after the date of the Indenture.
"Exempt Affiliate Transactions" means (a) transactions between or among the
Company and/or its Wholly Owned Subsidiaries, (b) advances to officers of the
Company or any Subsidiary of the Company in the ordinary course of business to
provide for the payment of reasonable expenses incurred by such persons in the
performance of their responsibilities to the Company or such Subsidiary or in
connection with any relocation, (c)
82
fees and compensation paid to and indemnity provided on behalf of directors,
officers or employees of the Company or any Subsidiary of the Company in the
ordinary course of business, (d) any employment agreement that is in effect on
the date of the Indenture and any such agreement entered into by the Company
or a Subsidiary of the Company after the date of the Indenture in the ordinary
course of business of the Company or such Subsidiary and (e) any Restricted
Payment that is not prohibited by the covenant set forth under the caption
"Certain Covenants--Restricted Payments".
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated EBITDA of such Person and its
Subsidiaries for such period to the Fixed Charges of such Person and its
Subsidiaries for such period. In the event that the Company or any of its
Subsidiaries incurs, assumes, guarantees or repays or redeems any Indebtedness
(other than revolving credit borrowings) or issues or redeems preferred stock
subsequent to the commencement of the four-quarter reference period for which
the Fixed Charge Coverage Ratio is being calculated but on or prior to the
date on which the event for which the calculation of the Fixed Charge Coverage
Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio
shall be calculated giving pro forma effect to such incurrence, assumption,
guarantee, repayment or redemption of Indebtedness, or such issuance or
redemption of preferred stock, as if the same had occurred at the beginning of
the applicable four-quarter reference period. For purposes of making the
computation referred to above, (i) acquisitions that have been made by the
Company or any of its Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first
day of the four-quarter reference period and Consolidated EBITDA for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, (ii) the
Consolidated EBITDA attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded and (iii) the Fixed Charges attributable
to discontinued operations, as determined in accordance with GAAP, and
operations or businesses disposed of prior to the Calculation Date, shall be
excluded, but only to the extent that the obligations giving rise to such
Fixed Charges will not be obligations of the referent Person or any of its
Subsidiaries following the Calculation Date.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Subsidiaries for such period (net of any interest income) including,
without limitation, amortization of original issue discount, noncash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if any)
pursuant to Hedging Obligations, but excluding amortization of deferred
financing charges for such period and (ii) the consolidated interest expense
of such Person and its Subsidiaries that was capitalized during such period,
and (iii) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Subsidiaries or secured by a Lien on
assets of such Person or one of its Subsidiaries (whether or not such
guarantee or Lien is called upon) and (iv) the product of (a) all cash
dividend payments (and noncash dividend payments in the case of a Person that
is a Subsidiary) on any series of preferred stock of such Person payable to a
party other than the Company or a Wholly Owned Subsidiary, multiplied by (b) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate
for taxes based on the income or profits of such Person, expressed as a
decimal, on a consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession of the United States, that are applicable to the circumstances as
of the date of determination; provided that, except as specifically provided
in the Indenture, all calculations made for purposes of determining compliance
with the covenants set forth in Article IV and Section 5.01 of the Indenture
(which include the covenants described above under "--Certain
83
Covenants") shall use GAAP as in effect on the date of the Indenture for
financial statements for fiscal years ending on or after December 29, 1996.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantor" means Krystal Aviation Co., Krystal Aviation Management Co. and
each Subsidiary of the Company formed or acquired (and each other Person that
becomes a Subsidiary of the Company) after the date of the Indenture; provided
that any Person constituting a Guarantor as described above shall cease to
constitute a Guarantor when its guarantee is released in accordance with the
terms of the Indenture.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person entered into in the ordinary course of business under interest
rate swap agreements, interest rate cap agreements and interest rate collar
agreements and other similar financial agreements or arrangements designed to
protect such Person against, or manage the exposure of such Person to,
fluctuations in interest rates.
"Holder" or "Holders" means any holder from time to time of the Notes.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations, or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable
incurred in the ordinary course of business, if and to the extent any of the
foregoing indebtedness (other than letters of credit and Hedging Obligations)
would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, as well as all indebtedness of others secured by a Lien
on any asset of such Person (whether or not such indebtedness is assumed by
such Person) and, to the extent not otherwise included, indebtedness of others
that is guaranteed by such Person that is recourse to such Person or that is
otherwise its legal liability.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or other extensions of credit or capital contributions to other
Persons (by means of any transfer of cash or other property but excluding
advances to officers of the type specified in clause (b) of the definition of
Exempt Affiliate Transactions), or any purchases, acquisitions for
consideration of Indebtedness, Equity Interests or other securities or
ownership by such Person of any Capital Stock, bonds, notes, debentures or
other securities (including, without limitation, any interests in a
partnership or joint venture) issued or owned by any other Person, and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP; provided that an acquisition by the Company
for consideration consisting of common equity securities of the Company shall
not be deemed to be an Investment.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person, determined in accordance with GAAP and before
any reduction in respect of preferred stock dividends, excluding, however, (i)
any gain (but not loss), together with any related provision for taxes on such
gain (but not loss), realized in connection with (a) any Asset Sale
(including, without limitation, dispositions pursuant to Sale and Leaseback
Transactions) or (b) the disposition of any securities by such Person or any
of its Subsidiaries or the extinguishment of any Indebtedness of such Person
or any of its Subsidiaries and (ii) any extraordinary or
84
nonrecurring gain (but not loss), together with any related provision for
taxes on such extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any
noncash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions), taxes paid or payable as
a result thereof, and any reserve for adjustment in respect of the sale price
of such asset or assets established in accordance with GAAP.
"Obligations" means any principal, interest, penalties, premiums, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Parent" means Port Royal Holdings, Inc., a Georgia corporation and 100%
owner of the Company.
"Permitted Indebtedness" means (i) the incurrence by the Company of
Indebtedness under the Credit Agreement and the incurrence by Subsidiaries of
the Company of guarantees thereof in an aggregate principal amount at any time
outstanding (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of the Company and its Subsidiaries
thereunder) not to exceed $25.0 million, less the aggregate amount of all Net
Proceeds of Asset Sales applied to permanently reduce the outstanding amount
or the commitments with respect to such Indebtedness pursuant to the covenant
described under the caption "--Asset Sales;" (ii) the incurrence by the
Company and any Guarantors of Indebtedness represented by the Notes and the
Note Guarantees; (iii) the incurrence by the Company or any of its
Subsidiaries of Indebtedness represented by Capital Lease Obligations (whether
or not incurred pursuant to Sale and Leaseback Transactions), mortgage
financings or Purchase Money Obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property used in the business of the Company or
such Subsidiary (provided that such Indebtedness is incurred within 180 days
of the date such property is purchased or the date on which such construction
of or improvement to such property is commenced) or any Permitted Refinancing
Indebtedness thereof (provided that the requirements of clause (ii) of the
definition of Permitted Refinancing Indebtedness need not be met for the
purposes of this clause (iii)) in an aggregate principal amount at any time
outstanding not to exceed the greater of (x) $15.0 million or (y) 10.0% of
Consolidated Net Tangible Assets; (iv) the incurrence by the Company of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund, any
Indebtedness permitted under the Fixed Charge Coverage Ratio Test described in
the covenant under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; (v) the incurrence by the Company or any of its Wholly Owned
Subsidiaries of intercompany Indebtedness between or among the Company and any
of its Wholly Owned Subsidiaries or between or among any Wholly Owned
Subsidiaries; provided, however, that (a) any subsequent issuance or transfer
of Equity Interests that results in any such Indebtedness being held by a
Person other than the Company or a Wholly Owned Subsidiary of the Company and
(b) any sale or other transfer of any such Indebtedness to a Person that is
not either the Company or a Wholly Owned Subsidiary of the Company shall be
deemed, in each case, to constitute an incurrence of such Indebtedness by the
Company or such Subsidiary, as the case may be; (vi) the incurrence by the
Company of Hedging Obligations; and (vii) the incurrence by the Company of
Indebtedness (in addition to Indebtedness permitted by any other clause of
this paragraph) in an aggregate principal amount at any time outstanding not
to exceed $10.0 million plus the aggregate amount of all Net Proceeds of Asset
Sales applied to permanently reduce the outstanding amount or commitments with
respect to Indebtedness under the Credit Agreement pursuant to the covenant
described under the caption "--Asset Sales."
"Permitted Investments" means (a) any Investments in the Company; (b) any
Investments in Cash Equivalents; (c) Investments made as a result of the
receipt of noncash consideration from an Asset Sale that was made pursuant to
and in compliance with the covenant described above under the caption
"Repurchase at the Option of Holders--Asset Sales;" (d) Investments in
property or assets to be used in any line of business in which the Company or
any of its Subsidiaries was engaged on the date of the Indenture or any
reasonable
85
extensions or expansions thereof; and (e) Investments in Wholly Owned
Subsidiaries of the Company and any entity that (i) is engaged in the same or
a similar line of business as the Company or any of its Subsidiaries was
engaged in on the date of the Indenture or any reasonable extensions or
expansions thereof and (ii) as a result of such Investment, becomes a Wholly
Owned Subsidiary of the Company.
"Permitted Liens" means with respect to any Person, (a) pledges or deposits
by such person under workmen's compensation laws, unemployment insurance laws
or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government
bonds to secure surety or appeal bonds to which such Person is a party, or
deposits as security for contested taxes or for the payment of rent, in each
case incurred in the ordinary course of business; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanic's Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings; or
other Liens arising out of judgments or awards against such Person with
respect to which such Person shall be proceeding with an appeal or other
proceedings for review; (c) Liens for property taxes not yet subject to
penalties for non-payment or which are being contested in good faith and by
appropriate proceedings; (d) Liens in favor of issuers of surety bonds or
letters of credit issued pursuant to the request of and for the account of
such Person in the ordinary course of its business; provided, however, that
such letters of credit do not constitute Indebtedness; (e) survey exceptions,
minor encumbrances, easements or reservations of, or rights of others for,
licenses, rights of way, sewers, electric lines, telegraph and telephone lines
and other similar purposes, or zoning or other restrictions as to the use of
real properties or liens incidental to the conduct of the business of such
Person or the ownership of its properties which were not incurred in
connection with Indebtedness and which do not in the aggregate materially
adversely affect the value of said properties or materially impair their use
in the operation of the business of such Person; (f) Liens securing
Indebtedness (including Indebtedness described in clause (iii) of the
definition of Permitted Indebtedness) incurred to finance the construction,
purchase or lease of, or repairs, improvements or additions to, property;
provided, however, that the Lien may not extend to any other property owned by
the Company or any Subsidiary at the time the Lien is incurred, and the
Indebtedness secured by the Lien may not be issued more than 180 days after
the later of the acquisition or construction of the property subject to the
Lien; (g) Liens to secure Indebtedness described in clause (i) of the
definition of Permitted Indebtedness; (h) Liens existing on the date of the
Indenture; (i) Liens on property or shares of stock of a Person at the time
such Person becomes a Subsidiary; provided, however, that any such Lien may
not extend to any other property owned by the Company or any Subsidiary; (j)
Liens on property at the time the Company or a Subsidiary acquires the
property including any acquisition by means of a merger or consolidation with
or into the Company or a Subsidiary; provided, however, that the Liens may not
extend to any other property owned by the Company or any Subsidiary; (k) Liens
securing Indebtedness or other obligations of a Subsidiary owing to the
Company or a Wholly Owned Subsidiary; (l) Liens securing Hedging Obligations
so long as the related Indebtedness is, and is permitted to be under this
Indenture, secured by a Lien on the same property securing such Hedging
Obligations; and (m) Liens to secure any refinancing, refunding, extension,
renewal or replacement (or successive refinancings, refundings, extensions,
renewals or replacements) as a whole, or in part, of any Indebtedness secured
by any Lien referred to in the foregoing clauses (f), (h), (i) and (j);
provided, however, that (x) such new Lien shall be limited to all or part of
the same property that secured the original Lien (plus improvements on such
property) and (y) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (A) the outstanding principal
amount or, if greater, committed amount of the Indebtedness described under
clauses (f), (h), (i) or (j) at the time the original Lien became a Permitted
Lien under the Indenture and (B) an amount necessary to pay any fees and
expenses, including premiums, related to such refinancing, refunding,
extension, renewal or replacement. Clause (m) shall not be deemed to limit the
provisions of clauses (a) through (e), (g) or (k).
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries; provided that: (i) the
principal amount of such Permitted Refinancing Indebtedness does not exceed
the principal amount of the Indebtedness so extended,
86
refinanced, renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either
by the Company or by the Subsidiary of the Company that is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Permitted Shareholders" means (i) those Persons who "beneficially own" (as
such term is defined in Rules 13d-3 and 13d-5 under the Exchange Act) voting
stock of the Parent as of the Issue Date; (ii) the spouses parents, siblings,
descendants (including children or grandchildren) of such Persons; (iii) in
the event of the incompetence or death of any of the Persons described in
clause (i) or (ii), such Person's estate, executor, administrator, committee
or other personal representative in each case who at any particular date shall
beneficially own or have the right to acquire, directly or indirectly, voting
stock of the Parent; (iv) any trusts created for the sole benefit of the
Persons described in clause (i),(ii) or (iii) or any trust for the benefit of
such trust or (v) any Person of which any of the Persons described in clause
(i), (ii) or (iii) (x) "beneficially owns" (as such term is defined in Rules
13d-3 and 13d-5 under the Exchange Act) on a fully-diluted basis all of the
voting stock of such Person or (y) is the sole trustee or general partner, or
otherwise has the sole power to manage the business and affairs, of such
Person.
"Person" means any individual, corporation, limited or general partnership,
joint venture, association, joint stock company, trust, limited liability
company, unincorporated organization or government or any agency or political
subdivision thereof.
"Public Equity Offering" means an underwritten primary public offering of
the common stock of the Company or of the common stock of the Parent pursuant
to an effective registration statement filed with the Commission in accordance
with the Securities Act (whether alone or in conjunction with a secondary
public offering).
"Purchase Money Obligations" of any Person means any obligations of such
Person to any seller or any other Person incurred or assumed to finance the
construction and/or acquisition of real or personal property to be used in the
business of such Person or any of its Subsidiaries in an amount that is not
more than 100% of the cost of such property, and incurred within 180 days
after the date of such construction or acquisition (excluding accounts payable
to trade creditors incurred in the ordinary course of business).
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Subsidiary of any property, whether owned by the
Company or any Subsidiary as of the date of the Indenture or later acquired,
which has been or is to be sold or transferred by the Company or such
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such property.
"Senior Bank Debt" means the Obligations outstanding under the Credit
Agreement.
"Senior Indebtedness" means, with respect to the Company, (i) the Notes,
(ii) the Senior Bank Debt and (iii) any other Indebtedness permitted to be
incurred by the Company under the terms of the Indenture, unless the
instrument under which such Indebtedness is incurred expressly provides that
it is subordinated in right of payment to any Indebtedness for money borrowed.
Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness
will not include (w) any liability for federal, state, local or other taxes
owed or owing by the Company, (x) any Indebtedness of the Company to any of
its Subsidiaries or other Affiliates, (y) any trade payables or (z) any
Indebtedness to the extent that it is incurred in violation of the Indenture
(other than Senior
87
Bank Debt incurred in accordance with the terms of the Credit Agreement as in
effect on the date of the initial issuance of the Notes). "Senior
Indebtedness" means, with respect to any Guarantor, any guarantee by such
Guarantor of Senior Indebtedness of the Company.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of such
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"U.S. Government Obligations" means (i) securities that are (a) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (b) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at
the option of the issuer thereof; and (ii) depositary receipts issued by a
bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with
respect to any U.S. Government Obligation which is specified in clause (i)
above and held by such bank for the account of the holder of such depositary
receipt, or with respect to any specific payment of principal or interest on
any U.S. Government Obligation which is so specified and held, provided that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt
from any amount received by the custodian in respect of the U.S. Government
Obligation or the specific payment of principal or interest of the U.S.
Government Obligation evidenced by such depositary receipt.
"Voting Stock" of a corporation means all classes of capital stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
product obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payments at final maturity, in respect thereof, by (b)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material U.S. federal income tax
consequences of the exchange of the Private Notes for the Exchange Notes
pursuant to the Exchange Offer. This discussion is based on provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), its legislative
history, judicial authority, current administrative rulings and practice, and
existing and proposed Treasury Regulations, all as in effect and existing on
the date hereof. Legislative, judicial or administrative changes or
interpretations after the date hereof could alter or modify the validity of
this discussion and the conclusions set forth below. Any such changes or
interpretations may be retroactive and could adversely affect a Holder of the
Private Notes or Exchange Notes.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that might be relevant to particular Holders in light of their
personal investment or tax circumstances or status, nor does it
88
discuss the U.S. federal income tax consequences to certain types of Holders
subject to special treatment under the U.S. federal income tax laws, such as
certain financial institutions, insurance companies, dealers in securities or
foreign currency, tax-exempt organizations, foreign corporations or non-
resident alien individuals, or persons holding Private Notes or Exchange Notes
that are a hedge against, or that are hedged against, currency risk or that
are part of a straddle or conversion transaction, or persons whose functional
currency is not the U.S. dollar. Moreover, the effect of any state, local or
foreign tax laws is not discussed.
EACH HOLDER OF A PRIVATE NOTE THAT IS PARTICIPATING IN THE EXCHANGE OFFER IS
STRONGLY URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE THE IMPACT OF
SUCH HOLDER'S PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL OR FOREIGN TAX LAWS OF THE
EXCHANGE OF THE PRIVATE NOTES FOR THE EXCHANGE NOTES PURSUANT TO THE EXCHANGE
OFFER.
The exchange of the Private Notes by any Holder for the Exchange Notes
pursuant to the Exchange Offer should not be treated as an "exchange" for
federal income tax purposes because the Exchange Notes should not be
considered to differ materially in kind or extent from the Private Notes.
Rather, Exchange Notes received by any Holder should be treated as a
continuation of the Private Notes in the hands of such Holder for tax
purposes. As a result, there should be no adverse federal income tax
consequences to Holders exchanging the Private Notes for Exchange Notes
pursuant to the Exchange Offer, and the federal income tax consequences of
holding and disposing of the Exchange Notes should be the same as the federal
income tax consequences of holding and disposing of the Private Notes.
Accordingly, a Holder's adjusted tax basis in the Exchange Notes will be the
same as its adjusted tax basis in the Private Notes exchanged therefor and its
holding period for the Private Notes will be included in its holding period
for the Exchange Notes. Thus, the determination of gain on a subsequent sale
or other disposition of the Exchange Notes will be the same as for the Private
Notes.
PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer in connection with resales of any Exchange Notes
received in exchange for Private Notes acquired by such broker-dealer as a
result of market-making or other trading activities. Each broker-dealer that
receives Exchange Notes for its own account in exchange for such Private Notes
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Company
agreed that for a period of up to one year after the closing of the Exchange
Offer, it will make this Prospectus, as amended or supplemented, available to
any such broker-dealer that requests copies of this Prospectus in the Letter
Transmittal for use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, negotiated
transactions or through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or
purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange
Notes that were received by it for its own account pursuant to the Exchange
Offer in exchange for Private Notes acquired by such broker-dealer as a result
of market-making or other trading activities and any broker-dealer
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on such
resale of Exchange Notes and any commissions or concessions received by such
persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit it is an "underwriter" within the meaning of the Securities Act.
89
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Private Notes (including any broker-dealers), certain
parties related to such holders, against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company by
Miller & Martin, Chattanooga, Tennessee. A. Alexander Taylor, II, an officer
of the Company, is a partner in the law firm of Miller & Martin.
EXPERTS
The financial statements included in this registration statement to the
extent and for the periods indicated in their report have been audited by
Arthur Andersen LLP, independent public accountants, and are included herein
in reliance upon the authority of said firm as experts in accounting and
auditing in giving said report.
90
THE KRYSTAL COMPANY AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1995, December 29, 1996, and September 28, 1997
(unaudited), and for the fiscal years ended January 1, 1995, December 31, 1995,
and December 29, 1996, and for the nine months ended September 29, 1996
(unaudited), and September 28, 1997 (unaudited):
Report of Independent Public Accountants.................................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Shareholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
The Krystal Company:
We have audited the accompanying consolidated balance sheets of The Krystal
Company (a Tennessee corporation) and subsidiary as of December 31, 1995 and
December 29, 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended January 1, 1995,
December 31, 1995 and 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 Krystal Company and
subsidiary as of December 31, 1995 and December 29, 1996, and the results of
their operations and their cash flows for the years ended January 1, 1995,
December 31, 1995 and December 29, 1996, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Chattanooga, Tennessee
February 13, 1997 (except
with respect to the matter
discussed in Note 3 as to
which the date is March 3, 1997)
F-2
THE KRYSTAL COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
ASSETS ------------ ------------ -------------
(UNAUDITED)
CURRENT ASSETS:
Cash and temporary investments........ $ 13,713 $ 28,765 $ 5,926
Receivables, net...................... 1,752 2,566 4,012
Income tax receivable................. 609 0 4,524
Net investment in direct financing
leases-current portion............... 856 562 305
Inventories........................... 2,322 2,156 1,890
Deferred tax asset.................... 5,553 8,327 2,844
Prepayments and other................. 830 1,980 1,075
-------- -------- --------
Total current assets................ 25,635 44,356 20,576
-------- -------- --------
NET INVESTMENT IN DIRECT FINANCING
LEASES, EXCLUDING CURRENT PORTION..... 867 305 100
-------- -------- --------
PROPERTY, BUILDINGS, AND EQUIPMENT, NET
OF ACCUMULATED DEPRECIATION OF $74,370
AT DECEMBER 31, 1995 AND $82,370 AT
DECEMBER 29, 1996..................... 98,546 91,173 88,525
-------- -------- --------
LEASED PROPERTIES, NET OF ACCUMULATED
AMORTIZATION OF $2,952 AT DECEMBER 31,
1995 AND $3,162 AT DECEMBER 29, 1996.. 1,863 1,653 1,509
-------- -------- --------
OTHER ASSETS:
Cash surrender value of life
insurance............................ 5,117 5,638 6,121
Other................................. 667 745 2,299
-------- -------- --------
Total other assets.................. 5,784 6,383 8,420
-------- -------- --------
$132,695 $143,870 $119,130
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................... $ 1,681 $ 4,535 $ 4,756
Accrued liabilities................... 9,427 17,986 18,257
Current portion of long-term debt..... 432 967 2,053
Current portion of capital lease
obligations.......................... 653 454 270
Income taxes payable.................. 0 822 --
-------- -------- --------
Total current liabilities........... 12,193 24,764 25,336
-------- -------- --------
LIABILITIES SUBJECT TO COMPROMISE
(NOTES 3 AND 7)....................... 56,909 58,317 0
-------- -------- --------
LONG-TERM DEBT, EXCLUDING CURRENT
PORTION............................... 3,621 3,090 34,573
-------- -------- --------
CAPITAL LEASE OBLIGATIONS, EXCLUDING
CURRENT PORTION....................... 2,754 2,278 2,077
-------- -------- --------
DEFERRED INCOME TAXES.................. 2,719 2,286 1,838
-------- -------- --------
OTHER LONG-TERM LIABILITIES............ 7,852 8,447 9,027
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 10
AND 11)
SHAREHOLDERS' EQUITY:
Preferred stock, without par value;
5,000,000 shares authorized; no
shares issued and outstanding........ 0 0 0
Common stock, without par value;
15,000,000 shares authorized; issued
and outstanding, 7,526,808 shares at
December 31, 1995 and 7,491,768
shares at December 29,1996........... 40,830 40,556 40,363
Retained earnings..................... 8,195 5,873 7,318
Deferred compensation................. (2,378) (1,741) (1,402)
-------- -------- --------
Total shareholders' equity.......... 46,647 44,688 46,278
-------- -------- --------
$132,695 $143,870 $119,130
======== ======== ========
The accompanying notes are an integral part of these balance sheets.
F-3
THE KRYSTAL COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED NINE MONTHS ENDED
------------------------------------ ---------------------------
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1995 1995 1996 1996 1997
---------- ------------ ------------ ------------- -------------
(UNAUDITED)
REVENUES:
Restaurant sales....... $239,104 $239,376 $236,470 $175,401 $178,815
Franchise fees......... 796 618 349 171 219
Royalties.............. 1,880 2,420 2,778 2,021 2,232
Other revenues......... 6,542 5,614 4,671 3,409 3,469
-------- -------- -------- -------- --------
248,322 248,028 244,268 181,002 184,735
-------- -------- -------- -------- --------
COST AND EXPENSES:
Cost of restaurant
sales................. 192,256 197,031 195,733 145,847 148,393
Depreciation and
amortization expense.. 11,213 12,311 11,378 8,447 8,216
General and
administrative
expenses.............. 25,775 25,770 25,422 19,567 19,656
Other expenses, net.... 4,946 4,417 3,809 2,742 2,444
Provisions for loss on
restaurant closing and
other property write-
downs (note 4)........ 0 3,911 0 -- --
Special charge (Note
11)................... 2,000 10,000 4,000 -- --
-------- -------- -------- -------- --------
236,190 253,440 240,342 176,603 178,709
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS). 12,132 (5,412) 3,926 4,399 6,026
REORGANIZATION ITEM
(NOTE 3)............... 0 (184) (3,846) (2,288) (1,218)
INTEREST EXPENSE:
Contractual rate
interest.............. (3,801) (4,134) (4,005) (3,002) (2,828)
Interest related to
certain pre-petition
liabilities........... 0 0 (791) (459) 96
INTEREST INCOME......... 820 718 814 820 517
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
PROVISION FOR (BENEFIT
FROM) INCOME TAXES..... $ 9,151 (9,012) (3,902) (530) 2,593
PROVISION FOR (BENEFIT
FROM) INCOME TAXES..... 2,962 (3,688) (1,480) (199) 928
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM..... $ 6,189 $ (5,324) $ (2,422) $ (331) $ 1,665
EXTRAORDINARY ITEM...... 0 0 0 -- (220)
-------- -------- -------- -------- --------
NET INCOME (LOSS)....... $ 6,189 $ (5,324) $ (2,422) $ (331) $ 1,445
EARNINGS (LOSS) PER
COMMON SHARE:
Earnings (loss) per
common share.......... $ 0.82 $ (0.71) $ (0.32) $ (0.04) $ 0.19
======== ======== ======== ======== ========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING............ 7,512 7,517 7,500 7,502 7,480
======== ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
F-4
THE KRYSTAL COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
COMMON RETAINED DEFERRED
STOCK EARNINGS COMPENSATION
------- -------- ------------
BALANCE, JANUARY 2, 1994........................ $40,911 $ 6,976 $(3,159)
Issuance of 1,440 common shares under re-
stricted stock plans......................... 20 0 (20)
Forfeiture of 8,000 restricted shares......... (22) 0 22
Net income.................................... 0 6,189 0
Amortization of deferred compensation......... 0 0 446
Tax benefit of restricted stock vested........ 0 273 0
------- ------- -------
BALANCE, JANUARY 1, 1995........................ 40,909 13,438 (2,711)
Issuance of 73,440 common shares under re-
stricted stock plans......................... 567 0 (567)
Forfeiture of 56,480 restricted shares........ (646) 0 646
Net loss...................................... 0 (5,324) 0
Amortization of deferred compensation......... 0 0 254
Tax benefit of restricted stock vested........ 0 81 0
------- ------- -------
BALANCE, DECEMBER 31, 1995...................... 40,830 8,195 (2,378)
Issuance of 960 common shares under restricted
stock plan................................... 4 0 (4)
Forfeiture of 36,000 restricted shares........ (278) 0 278
Net loss...................................... 0 (2,422) 0
Amortization of deferred compensation......... 0 0 363
Tax benefit of restricted stock vested........ 0 100 0
------- ------- -------
BALANCE, DECEMBER 29, 1996...................... $40,556 $ 5,873 $(1,741)
Net income.................................... 0 1,445 0
Issuance of 720 common shares to management
and non-employee director under restricted
stock plan .................................. 4 0 (4)
Forfeiture of 16,400 restricted shares........ (158) 0 158
Amortization of deferred compensation......... 0 0 98
------- ------- -------
BALANCE, SEPTEMBER 28, 1997 (UNAUDITED)......... $40,363 $ 7,318 $(1,402)
======= ======= =======
The accompanying notes are an integral part of these statements.
F-5
THE KRYSTAL COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED NINE MONTHS ENDED
------------------------------------ ---------------------------
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1995 1995 1996 1996 1997
---------- ------------ ------------ ------------- -------------
(UNAUDITED)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)...... $ 6,189 $ (5,324) $(2,422) $ (331) $ 1,445
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities............
Depreciation and
amortization........ 11,213 12,221 11,378 8,447 8,216
Deferred income
taxes............... (1,568) (5,011) (3,207) -- (448)
Decrease in deferred
tax asset........... (448) -- 5,483
Provision for loss on
restaurant closings
and other property
write-downs......... 0 3,911 0 -- 354
(Increase) decrease
in receivables, net. (270) 406 (814) (31) (1,446)
(Increase) decrease
in income tax
receivable.......... 0 (609) 609 (594) (4,524)
(Increase) decrease
in inventories...... 47 (185) 166 294 266
(Increase) decrease
in prepayments and
other............... 222 (49) (1,150) (252) 905
Increase (decrease)
in accounts payable. 692 (5,423) 2,854 2,104 221
Increase (decrease)
in income taxes
payable............. (643) (318) 822 -- (822)
Increase (decrease)
in accrued
liabilities......... 2,670 (3,376) 8,559 6,235 2271
Other, net........... 1,068 523 (64) (131) (2,136)
Increase in
liabilities from
reorganization
activities.......... 0 20,909 1,408 (3,034) (22,317)
-------- -------- ------- ------- --------
Net cash provided by
(used in) operating
activities......... 19,620 17,675 18,139 12,707 (14,532)
-------- -------- ------- ------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property,
buildings, and
equipment............. (26,653) (16,307) (6,457) (4,149) (5,507)
Proceeds from sale of
property, buildings,
and equipment......... 793 908 3,282 2,083 554
Payments received on
net investment in
direct financing
leases................ 673 766 856 643 462
-------- -------- ------- ------- --------
Net cash used in
investing
activities......... (25,187) (14,633) (2,319) (1,423) (4,491)
-------- -------- ------- ------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Decrease in debt from
reorganization
activities............ 0 0 0 -- (36,000)
Proceeds from issuance
of long-term debt..... 20,218 0 0 -- 36,320
Repayments of long-
term debt............. (4,657) (3,472) (53) (41) (3,751)
Principal payments of
capital lease
obligations........... (593) (652) (675) (512) (385)
Other.................. (413) (9) (40) -- --
-------- -------- ------- ------- --------
Net cash provided by
(used in) financing
activities......... 14,555 (4,133) (768) (553) (3,816)
-------- -------- ------- ------- --------
NET INCREASE (DECREASE)
IN CASH AND TEMPORARY
INVESTMENTS............ 8,988 (1,091) 15,052 10,731 (22,839)
CASH AND TEMPORARY
INVESTMENTS, BEGINNING
OF PERIOD ............. 5,816 14,804 13,713 13,713 28,765
-------- -------- ------- ------- --------
CASH AND TEMPORARY
INVESTMENTS, END OF
PERIOD................. $ 14,804 $ 13,713 $28,765 $24,444 $ 5,926
======== ======== ======= ======= ========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION:
Cash paid during the
period for:
Interest, net of
amount capitalized.. $ 3,600 $ 4,005 $ 648 $ 513 $ 6,928
======== ======== ======= ======= ========
Income tax........... $ 4,176 $ 1,819 $ 917 $ 637 $ 1,159
======== ======== ======= ======= ========
Reorganization item.. $ 0 $ 184 $ 1,092 $ 618 $ 2,531
======== ======== ======= ======= ========
The accompanying notes are an integral part of these statements.
F-6
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
The Krystal Company (a Tennessee corporation) is engaged primarily in the
development, operation and franchising of fast food restaurants in the
southeastern United States. Krystal's wholly-owned subsidiary, Krystal
Aviation Co. ("Aviation") operates a fixed base airport hangar operation in
Chattanooga, Tennessee. Aviation's revenues in each of the last three years
were less than 3% of the Company's total revenues. As discussed in Note 3, on
December 15, 1995, Krystal filed a petition for relief under Chapter 11 of the
federal bankruptcy laws.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
The Krystal Company ("Krystal") and Aviation (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 occasionally have a 53 week fiscal year. The
years ended January 1, 1995, December 31, 1995 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. As of December
29, 1996, Krystal was holding $23,913,000 in certificates of deposits which
are included in cash and temporary investments in the accompanying
consolidated balance sheet.
Inventories
Inventories are stated at cost and consist primarily of food, paper products
and other supplies. The Company uses the last-in, first-out (LIFO) method of
accounting for a substantial portion of its inventories. If the first-in,
first-out (FIFO) method had been used instead of LIFO, inventories at December
31, 1995 and December 29, 1996, would have been approximately $2,485,000 and
$2,310,000, respectively.
Property, Buildings and Equipment
Property, buildings and equipment are stated at cost. Expenditures which
materially increase useful lives are capitalized, whereas ordinary maintenance
and repairs are expensed as incurred. All significant properties are reviewed
periodically for operational suitability, and, if such properties are
determined to be unsuitable for future operations, reserves are provided to
reduce the properties to estimated realizable values. 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
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 on accounting for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to assets to be held and used. SFAS No. 121 also establishes
accounting standards for long-lived assets and certain identifiable
intangibles to be disposed of. The Company adopted SFAS No. 121 effective the
beginning of fiscal 1996. The adoption of SFAS No. 121 did not have a
significant impact on the Company's consolidated financial position and
results of operations.
F-7
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
Under SFAS No. 109, "Accounting for Income Taxes", deferred tax assets and
liabilities are computed based on the difference between the financial
statement and income tax bases of assets and liabilities using the enacted tax
rate. Deferred income tax expenses or benefits are based on the changes in the
asset or liability from period to period. Tax benefits are recognized in the
financial statements in the period in which they are generated.
Franchise and License Agreements
Franchise or license agreements are available for single and multi-unit
restaurants. The multi-unit agreement establishes the number of restaurants
the franchisee or licensee is to construct and open in the franchised area
during the term of the agreement. At December 31, 1995, there were 80
franchised or licensed restaurants of which 50 restaurants were operated under
multi-unit agreements. At December 29, 1996, there were 89 franchised or
licensed restaurants of which 57 restaurants were operated under multi-unit
agreements. Franchisees and licensees are required to pay the Company a
franchise or license fee and a weekly royalty and service fee of either 4.5%
or 6.0%, depending on the duration of the franchise agreement, of the
restaurants' gross receipts. Unit franchise and license fees are recorded as
income as related restaurants begin operations. Royalty and service fees,
which are based on restaurant sales of franchisees and licensees, are accrued
as earned Franchise fees received prior to the opening of the restaurant are
deferred and included in accrued liabilities on the consolidated balance
sheets. At December 31, 1995 and December 29, 1996, total deferred franchise
and license fees were approximately $715,000 and $682,000, respectively.
Earnings Per Common Share
Earnings per common share is based on the weighted average number of common
shares outstanding.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB NO. 25). Effective in 1996, the Company adopted the disclosure option of
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires
companies that do not choose to account for stock-based compensation as
prescribed by the statement to disclose the pro forma effects on net income
and earnings per share as if SFAS No. 123 had been adopted. Additionally,
certain other disclosures are required with respect to stock-based
compensation and the assumptions used to determine the pro forma effects of
SFAS No. 123.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in the fiscal 1995 financial
statements to conform with the 1996 presentation.
3. PETITION FOR RELIEF UNDER CHAPTER 11
On December 15, 1995 (the "petition date"), Krystal filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code with
the United States Bankruptcy Court for the Eastern District of Tennessee in
Chattanooga, Tennessee (the "Court"), for the purpose of completely and
finally resolving the
F-8
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
various claims filed against the Company by current and former employees
alleging violations of the Fair Labor Standards Act of 1938 ("FLSA"). Under
Chapter 11, enforcement of certain pre-petition unsecured claims were stayed,
while Krystal continues operations in the ordinary course of business as a
debtor-in-possession. These unsecured stayed claims are reflected in the
accompanying December 31, 1995 and December 29, 1996 consolidated balance
sheets as liabilities subject to compromise (Notes 6, 7 and 11). Claims
secured by Krystal's assets ("secured claims") were also stayed, although the
holders of such claims have the right on motion to the Court for relief from
the stay. Secured claims are secured primarily by liens on some of Krystal's
real property and buildings. Any additional claims that have arisen subsequent
to the petition date which include amounts determined by the Court as
allowable claims for contingencies and other disputed amounts have been
included in liabilities subject to compromise at December 29, 1996.
Krystal's wholly-owned subsidiary, Aviation, did not file a petition for
relief under Chapter 11 with the Court. Separate condensed financial
statements of Krystal have not been presented as the operations of Krystal
represent substantially all of the operations of the Company.
A plan of reorganization, as amended (the "Plan") was formally filed on
February 24, 1997. The terms of the Plan provide for full payment of all
administrative expenses, tax claims, priority claims and secured claims. The
Plan also provides for full payment of unsecured claims which includes trade
and financial creditors. The Plan further provides for interest of 8.5% per
annum or a market rate determined to be appropriate by the Court for unsecured
trade creditors. Interest will be paid from the later of the petition date or
the date at which the obligation became due. The Plan also provides for the
payment of 1.3% per annum penalty interest on the unsecured senior notes held
by financial creditors.
The Court has approved the distribution of the Plan which must be accepted
by at least two-thirds in amount and by more than one-half in number of the
voting unsecured creditors. The Court has set a confirmation hearing date for
the Plan on April 9, 1997 at which time the Plan will be granted or denied by
the Court (the "Confirmation Order"). The Plan states that as a condition to
the Confirmation Order, Krystal must present to the Court the settlement of
the FLSA class suit (Note 11) and the successful consummation of a loan
transaction whereby Krystal will borrow at least $45,000,000 from a commercial
lending institution on or before the distribution date of the Plan. On March
3, 1997, Krystal received a commitment from a financial institution to provide
the financing required by the Plan. The commitment provides 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 are
to be secured by substantially all of the Company's assets. Funding of this
commitment is subject to fulfillment of certain conditions and requirements.
In 1995, Krystal received approval from the Court to pay or otherwise honor
certain of its pre-petition obligations, including employee wages and
benefits; and, accordingly, these amounts have been paid or are included in
the appropriate liability captions on the accompanying consolidated balance
sheet at December 31, 1995. In 1996, Krystal received approval from the Court
to pay certain pre-petition obligations including state sales taxes, real and
business personalty taxes; and accordingly, these amounts have been paid and
are excluded as liabilities subject to compromise on the accompanying
consolidated balance sheets at December 29, 1996. Krystal paid $3,024,000 in
pre-petition obligations in 1996.
Interest income of approximately $375,000 earned on excess cash due to the
bankruptcy has been recorded as a reduction in interest expense related to
certain pre-petition liabilities which include the 1.3% penalty interest on
the senior notes and the 8.5% interest expense associated with the unsecured
pre-petition trade payables. All other interest income and contractual
interest expense incurred in the ordinary course of business has been reported
separately in the accompanying consolidated statement of operations for the
year ended December 29, 1996.
F-9
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Professional and other fees of $184,000 and $3,846,000 incurred as a result
of Krystal's Chapter 11 filing have been segregated from expenses related to
ordinary operations and reported as a reorganization item in the accompanying
consolidated statements of operations for the years ended December 31, 1995
and December 29, 1996, respectively.
4. PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment at December 31, 1995 and December 29,
1996, consisted of the following (in thousands):
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
Land........................ $ 35,102 $ 33,803
Buildings and improvements.. 48,905 49,044
Equipment................... 67,328 69,467
Leaseholds.................. 20,228 20,333
Construction in progress.... 1,353 896
-------- --------
172,916 173,543
Accumulated depreciation and
amortization............... (74,370) (82,370)
-------- --------
$ 98,546 $ 91,173
======== ========
In December 1995, the Company recorded a provision for loss on restaurant
closings and other property write-downs of $3,911,000 which is reflected in
the accompanying consolidated statement of operations for the year ended
December 31, 1995. This provision primarily relates to the Company's estimated
losses to be incurred associated with decisions to close certain restaurants.
5. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1995 and December 29, 1996, consisted of
the following (in thousands):
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
Salaries, wages and vacation
pay........................ $3,442 $ 3,477
Workers' compensation....... 3,295 3,753
State sales taxes........... 774 1,321
Deferred franchise fees..... 715 682
Accrued interest............ 234 4,178
Accrued reorganization ex-
penses..................... 0 2,286
Other....................... 967 2,289
------ -------
$9,427 $17,986
====== =======
F-10
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INDEBTEDNESS
Long-term debt at December 31, 1995 and December 29, 1996, consisted of the
following (in thousands):
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
7.6% senior notes, payable in annual install-
ments beginning in May 1997 and balance due May
2004........................................... $ 20,000 $ 20,000
11.16% senior notes, payable in annual install-
ments and balance due May 1999................. 16,000 16,000
10.5% mortgage bonds, payable in monthly in-
stallments through October 2001................ 2,884 2,884
Other........................................... 1,169 1,173
-------- --------
40,053 40,057
Less--Current maturities........................ (432) (967)
Liabilities subject to compromise............... (36,000) (36,000)
-------- --------
$ 3,621 $ 3,090
======== ========
Unsecured debt included in liabilities subject to compromise at December 31,
1995 and December 29, 1996 consisted of the $20,000,000 senior notes and the
$16,000,000 senior notes.
On December 29, 1996, outstanding letters of credit not reflected in the
accompanying financial statements aggregated approximately $3,461,000. Letters
of credit issued in 1996 of $800,000 are collateralized by the Company with
certificates of deposit which are included in cash and temporary investments
on the balance sheet.
Property and buildings with a net book value of $3,181,000 at December 29,
1996, are pledged as collateral on the 10.5% mortgage bonds.
Maturities of long-term debt not subject to compromise subsequent to
December 29, 1996, are as follows (in thousands):
1997.................................... $967
1998.................................... 514
1999.................................... 566
2000.................................... 611
2001.................................... 527
Thereafter.............................. 872
The Company's debt agreements contain 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. Due to the Chapter 11
proceedings, the Company was not in compliance with certain restrictive
covenants of the Company's debt agreements at December 29, 1996. Such debt is
classified as liabilities subject to compromise in the accompanying
consolidated balance sheet at December 29, 1996.
Due to the extenuating circumstances involving both secured and unsecured
long-term debt as a result of the Chapter 11 filing, it is not practicable to
estimate the fair value of long-term debt at December 31, 1995 and at December
29, 1996.
F-11
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise at December 31, 1995 and December 29,
1996, consisted of the following (in thousands):
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
Unsecured long-term debt......................... $36,000 $36,000
Accounts payable................................. 7,542 7,920
Special charge reserve........................... 9,849 13,875
State sales taxes................................ 1,657 0
Real estate and business personalty taxes........ 1,349 10
Other............................................ 512 512
------- -------
$56,909 $58,317
======= =======
8. BENEFIT PLANS
RETIREMENT PLANS--
The Company has a noncontributory, defined benefit pension plan covering
substantially all operating and salaried employees. The plan provides benefits
of stated amounts based on years of service and the employee's compensation.
The Company's funding policy is consistent with the requirements of the
Employee Retirement Income Security Act of 1974. Plan assets at December 31,
1995 and December 29, 1996, are invested primarily in equity securities,
managed international equity and bond index funds and U.S. government
securities.
Net pension expense included the following components (in thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
---------- ------------ ------------
Service cost (benefits earned during
the period)........................ $ 1,451 $ 1,182 $ 1,594
Interest cost on projected benefit
obligation......................... 1,493 1,575 1,728
Actual return on plan assets........ (646) (5,254) (4,224)
Net amortization and deferral....... (1,368) 3,253 1,868
------- ------- -------
Net pension expense................. $ 930 $ 756 $ 966
======= ======= =======
The following table sets forth the status of the plan as of December 31,
1995 and December 29, 1996: (in thousands)
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
Actuarial present value of accumulated benefit
obligations:
Vested benefit obligation...................... $ 19,401 $ 19,884
Nonvested benefit obligation................... 822 767
-------- --------
Accumulated benefit obligation.................. $ 20,223 $ 20,651
======== ========
Projected benefit obligation.................... $(22,613) $(24,112)
Plan assets at fair value....................... 24,819 27,936
-------- --------
Plan assets in excess of projected benefit obli-
gation......................................... 2,206 3,824
Unrecognized net gain........................... (4,196) (6,893)
Unrecognized initial asset...................... (1,450) (1,160)
Unrecognized prior service cost................. 577 400
-------- --------
Pension liability recognized in the consolidated
balance sheets................................. $ (2,863) $ (3,829)
======== ========
F-12
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Unrecognized prior service cost resulted from plan amendments providing an
accelerated vesting schedule and increased benefits for certain participants
based on services rendered in prior periods. This amount is being amortized
over the average future service of employees expected to receive benefits from
the plan.
The projected benefit obligation was determined using a discount rate of
8.5% , 7.5% and 8.0% at, January 1, 1995, December 31, 1995 and December 29,
1996, respectively. The assumed rate of compensation increase was 4%, 3% and
3% in 1994, 1995 and 1996 respectively. The expected long-term rate of return
on plan assets was 9% in 1994, 1995 and 1996.
The Company also has a supplemental executive retirement plan for certain
officers. The plan provides additional benefits upon retirement. The
supplemental retirement benefit shall be paid over the officers' lifetime but
for no less than a period of 10 years following retirement. The Company
provides an annual amount necessary to amortize the total cost of the
estimated deferred compensation at retirement. Total deferred compensation
accrued for this plan at December 31, 1995 and December 29, 1996, was
$2,609,000 and $2,876,000, respectively.
The Company is the beneficiary of life insurance policies with a face amount
of $7,722,000 at December 29, 1996. Total cash surrender value of such life
insurance at December 31, 1995 and December 29, 1996 was $5,117,000 and
$5,638,000, respectively.
POSTRETIREMENT HEALTH CARE AND DENTAL BENEFITS--
Employees retiring from the Company on or after attaining age 55 that meet
certain eligibility requirements are entitled to postretirement health care
and dental benefit coverage. These benefits vary for hourly and salaried
employees and are subject to deductibles, copayment provisions and other
limitations. The Company may amend or change the plan periodically. Retirees
contribute at a fixed rate per month toward the cost of the plan.
Net periodic postretirement health care benefits cost included the following
components (in thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
---------- ------------ ------------
Service cost (benefits earned during
the period)......................... $ 96 $ 74 $ 78
Interest cost on accumulated
postretirement health care benefits
obligation.......................... 66 68 67
---- ---- ----
Net periodic postretirement health
care benefits cost.................. $162 $142 $145
==== ==== ====
The following table sets forth the funded status of the plan, reconciled to
the accrued postretirement health care benefits recognized in the Company's
consolidated balance sheets at December 31, 1995 and December 29, 1996 (in
thousands):
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
Accumulated postretirement health care
benefits obligation:
Retirees..................................... $171 $ 146
Employees fully eligible..................... 232 270
Other active participants.................... 540 553
---- ------
Total....................................... 943 969
Unrecognized net gain (loss).................. (15) 36
---- ------
Accrued postretirement health care benefits
cost......................................... $928 $1,005
==== ======
F-13
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1995, a 12.0% annual rate of increase in the per capita cost of covered
health care benefits was assumed for measurement purposes, reducing to an 8%
annual rate of increase after two years. In 1996, a 6.0% annual rate of
increase was assumed for all periods. The effect of a one percentage point
increase in the health care cost trend assumption would not have a significant
effect on the accumulated postretirement benefits obligation as of December
29, 1996 and the periodic postretirement health care benefit cost for the year
then ended. The weighted-average discount rate used in determining the
accumulated postretirement health care benefits obligation was 7.5% and 8.0%
at December 31, 1995 and December 29, 1996, respectively.
9. INCOME TAXES
The provision for (benefit from) income taxes included the following
components (in thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
---------- ------------ ------------
Current tax provision:
Federal............................. $ 3,940 $ 1,176 $ 1,459
State............................... 590 147 268
------- ------- -------
4,530 1,323 1,727
Deferred income taxes................ (1,568) (5,011) (3,207)
------- ------- -------
Provision for (benefit from) income
taxes............................... $ 2,962 $(3,688) $(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
December 31, 1995 and December 29, 1996, were as follows (In thousands):
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
Current deferred tax asset:
Special charge reserve............................... $ 3,673 $ 5,273
Workers' compensation................................ 1,176 1,426
Deferred franchise fees.............................. 272 259
Miscellaneous payables............................... 272 703
Accrued interest..................................... 0 242
Other................................................ 160 424
------- -------
Current deferred tax asset............................ $ 5,553 $ 8,327
======= =======
Noncurrent net deferred tax liability:
Noncurrent deferred tax asset:
Deferred compensation................................ $ 1,779 $ 2,019
Accrued pension cost................................. 1,239 1,465
Accrued postretirement benefit cost.................. 389 445
Other................................................ 189 286
------- -------
Noncurrent deferred tax asset........................ 3,596 4,215
------- -------
Noncurrent deferred tax liability:
Property, buildings and equipment.................... (6,258) (6,501)
Other................................................ (57) 0
------- -------
Noncurrent deferred tax liability.................... (6,315) (6,501)
------- -------
Noncurrent net deferred tax liability................ $(2,719) $(2,286)
======= =======
F-14
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The difference between the reported income tax provision and the "expected"
tax provision (benefit) based on the current statutory federal income tax rate
is as follows (In thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
---------- ------------ ------------
Computed "expected" tax provision
(benefit)................................ $3,111 $(3,122) $(1,327)
Targeted jobs tax credits................. (444) (137) 0
State income taxes (net of federal income
tax effect).............................. 257 (340) (99)
Other, net................................ 38 (89) (54)
------ ------- -------
Reported tax provision (benefit).......... $2,962 $(3,688) $(1,480)
====== ======= =======
10. LEASES
The Company leases certain buildings and equipment and a number of
restaurants (land and/or building) under noncancellable lease agreements, some
of which are subleased to third parties. The restaurant lease terms are
normally for a period of 20 years with options that permit renewals for
additional periods. Certain leases provide for additional contingent rentals
based on sales. Generally, the building portions of the restaurant leases have
been recorded as capital leases, while the land portions have been recorded as
operating leases.
The future minimum lease payments under capital and operating leases,
together with the present value of such minimum lease payments as of December
29, 1996, are summarized as follows (In thousands):
CAPITAL OPERATING
YEAR LEASES LEASES
---- ------- ---------
1997.................................................... $ 720 $ 3,854
1998.................................................... 463 3,074
1999.................................................... 364 2,458
2000.................................................... 364 1,949
2001.................................................... 364 1,507
Thereafter.............................................. 1,873 5,217
------ -------
Total minimum lease payments.......................... 4,148 $18,059
=======
Less amount representing interest....................... 1,416
------
Present value of minimum lease payments including cur-
rent portion........................................... $2,732
======
Rental expense under operating leases was $4,666,000, $4,715,000 and
$5,212,000 in 1994, 1995 and 1996, respectively.
Rental expense includes contingent rentals of $156,000, $117,000 and
$110,000 in 1994, 1995 and 1996, respectively.
F-15
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Direct Financing and Operating Leases/Subleases with Third Parties
The Company owns or leases from outside parties certain land and buildings
which are leased/subleased to third parties. Generally, the building portions
of the leases/subleases are treated as direct financing leases while the land
portions of the leases/subleases are treated as operating leases. The
following summarizes the components of the net investment in direct financing
leases and the minimum future rentals on operating leases/subleases as of
December 29, 1996 (In thousands):
DIRECT
FINANCING OPERATING
YEAR LEASE LEASES
---- --------- ---------
1997.................................................. $633 $ 627
1998.................................................. 268 458
1999.................................................. 56 343
2000.................................................. 6 314
2001.................................................. 244
Thereafter............................................ 3
---- ------
Total minimum lease payments to be received......... 963 $1,989
======
Less unearned income.................................. (96)
----
Net investment in direct financing leases including
current portion...................................... $867
====
Rental income under operating leases was $629,000, $626,000 and $557,000 in
1994, 1995 and 1996, respectively.
11. CONTINGENCIES
In July 1994, Krystal was named a defendant in a suit filed in the United
States District Court for the Middle District of Tennessee, in which 41
plaintiffs, who were current and former employees of Krystal, alleged
violations of the FLSA and sought back wages, liquidated damages, costs and
attorney's fees. The suit alleged that the plaintiffs were uncompensated for
time which they worked on Krystal's behalf. In February 1995, ten additional
plaintiffs, also current and former employees of Krystal, filed a separate
suit in the same court containing essentially the same allegations. As a
result, Krystal established a reserve of $2,000,000 in 1994 to cover the
claims of the plaintiffs in the two suits, the costs associated therewith, and
the claims of any other employees and the costs associated therewith.
On April 18, 1995, Krystal settled the July 1994 case by agreeing to pay
$840,000 to the plaintiffs and their counsel. By order dated August 28, 1995,
the Court in the February 1995 case provisionally granted the plaintiffs
motion for court-supervised notice of the pendency of that action to
prospective class members from among current and former employees of Krystal
for the past three years.
In the third quarter of 1995, a total of 17 additional current and former
employees of Krystal filed three additional suits in the United States
District Courts for the Northern District of Georgia, the Northern District of
Alabama and the Middle District of Florida, containing essentially the same
allegations as set forth in the July 1994 and February 1995 suits.
In light of the three suits filed against Krystal during the third quarter
of 1995 and the order entered in the February 1995 suit provisionally granting
the plaintiffs motion for court-supervised notice of the pendency of
F-16
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
that action, Krystal established an additional $10,000,000 reserve to cover an
estimate of the exposure resulting from (i) the claims of the plaintiffs in
the four pending suits, (ii) the potential for additional claims of other
current and former employees, (iii) related claims, and (iv) the costs
associated therewith.
On December 15, 1995, Krystal filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code with the Court for the purpose of completely
and finally resolving the various claims filed against the Company by current
and former employees alleging violations of the FLSA. The four pending
lawsuits filed against Krystal under the FLSA have been stayed by the
bankruptcy filing.
Subsequent to December 29, 1996, Krystal and the majority of the FLSA
plaintiffs reached a settlement providing for the payment of approximately
$13,000,000 for the FLSA claims and related legal costs. At December 29, 1996,
the Company established an additional $4,000,000 reserve related to the FLSA
claim. Management believes the accrual for employee claims of $13,875,000 at
December 29, 1996 is adequate to meet its ultimate obligation for the FLSA
claims.
The Company is party to other various legal proceedings incidental to its
business. The ultimate disposition of these matters is not presently
determinable but will not, in the opinion of management, have a material
adverse effect on the Company's financial condition or results of operations.
12. RESTRICTED STOCK AND STOCK OWNERSHIP PLANS
The Company's 1990 Restricted Stock Plan ("Restricted Stock Plan") provides
for the granting of shares of common stock to certain directors and key
employees of the Company. The number of shares that may be issued under the
Restricted Stock Plan may not exceed 1,100,000 shares. The shares issued under
the Restricted Stock Plan when issued are restricted and subject to forfeiture
under certain circumstances.
Restricted stock may not be sold or otherwise transferred, and, if
employment of the restricted stockholder terminates for any reason other than
death, normal retirement, total disability, approved early retirement, or
other approved termination, the restricted stock will be forfeited. Restricted
stock which has been forfeited may be reissued under the Restricted Stock
Plan. As to restricted stock issued before April 14, 1992, restrictions
generally lapse 15% each year. As to restricted stock issued on or after April
14, 1992, restrictions will generally lapse as to 10% of the restricted stock
between the second and third anniversary of the date of grant and then 10% per
year thereafter. However, restrictions on 430,000 shares granted to two
officers of the Company will only lapse in the event of death, normal
retirement, total disability, approved early retirement, or other approved
termination. Restrictions also terminate on the occurrence of certain events
including dissolution or change in control of the Company. The Restricted
Stock Plan provides for the issuance of additional shares to each restricted
stockholder in the event annual lapsing of the restrictions is waived. The
additional shares issued to the restricted stockholder each year is limited to
10% of the number of restricted shares for which the annual lapsing is waived.
Restricted stock has the same dividend and voting rights as other outstanding
common stock.
During 1992, the Company adopted a restricted stock plan ("Non-Employee
Director Plan") which provides for the issuance of 8,000 shares of restricted
stock to each existing non-employee director who has not previously been
awarded restricted stock. This plan provides for the issuance of an additional
800 shares of restricted stock to each non-employee director in the event
annual lapsing of the restrictions is waived. The
F-17
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
restrictions generally lapse 15% each year beginning two years after the date
of grant. summary of the Company's restricted stock activity is as follows:
RESTRICTED NON-EMPLOYEE
STOCK PLAN DIRECTOR PLAN
---------- -------------
(NUMBER OF SHARES)
Issued at January 2, 1994........................ 958,000 16,000
Issued at an average market value of $14.00 per
share.......................................... 1,200 240
Forfeitures..................................... (8,000) 0
------- -------
Issued at January 1, 1995........................ 951,200 16,240
Issued at an average market value of $7.75 per
share.......................................... 73,200 240
Forfeitures..................................... (40,000) (16,480)
------- -------
Issued at December 31, 1995...................... 984,400 0
Issued at an average market value of $4.63 per
share.......................................... 960 0
Forfeitures..................................... (36,000) 0
------- -------
Issued at December 29, 1996...................... 949,360 0
======= =======
Deferred compensation related to the restricted stock awards is recorded
based on the market value of the Company's common stock at the date of grant
and such deferred compensation is amortized to expense over the period the
restrictions lapse. Compensation expense related to the restricted stock plans
was $445,624, $254,203, and $363,688, in 1994, 1995, and 1996, respectively.
During 1994, the Company adopted a stock option plan which provides for the
issuance of up to 1,100,000 common stock options (less the number of shares of
common stock that are at any time issued and outstanding under the Restricted
Stock Plan) to key employees and non-employee directors. At December 29, 1996,
no options had been granted under this stock option plan.
Effective March 1, 1994, all employees of the Company (excluding those who
own restricted stock of the Company) who have attained age eighteen and who
have been employed for one year are eligible to participate in the Company's
employee stock purchase plan (the "ESPP"). The ESPP provides that each
participant may authorize the Company to deduct up to $3,600 of their annual
earnings and deposit such amounts with an independent custodian. The Company
will contribute an additional 15% to the first $1,800 of the participant's
deduction and deposit such amount with the custodian. The custodian causes to
be purchased, as nominee for the participants, common stock of the Company at
prevailing market prices and distributes the shares purchased to the
participants upon request. The Company's contributions under the ESPP, which
were charged to expense, were not significant in 1995 or 1996.
The Company applies APB Opinion 25 and related interpretations in accounting
for its stock-based compensation plans described above. Had compensation cost
for these plans been determined based on the provisions of SFAS No. 123, the
effect on the Company's net income and earning per share would not be
significant in 1995 or 1996.
F-18
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. QUARTERLY INFORMATION (UNAUDITED)
(In thousands of dollars, except per share amounts)
FISCAL 1995
EARNINGS
OPERATING NET (LOSS) PER
INCOME INCOME COMMON
REVENUES (LOSS) (LOSS) SHARE(1)
-------- --------- ------- ----------
Quarter Ended:
April 2............................ $ 58,196 $ 1,356 $ 327 $ 0.04
July 2............................. 63,501 2,818 1,215 0.16
October 1 (2)...................... 62,508 (8,365) (5,731) (0.76)
December 31 (3).................... 63,823 (1,221) (1,135) (0.15)
-------- ------- ------- ------
Total............................. $248,028 $(5,412) $(5,324) $(0.71)
======== ======= ======= ======
FISCAL 1996
EARNINGS
OPERATING NET (LOSS) PER
INCOME INCOME COMMON
REVENUES (LOSS) (LOSS) SHARE(1)
-------- --------- ------- ----------
Quarter Ended:
March 31........................... $ 57,667 $ 693 $ (746) $(0.10)
June 30............................ 60,903 2,095 426 0.06
September 29....................... 62,432 1,611 (11) 0.00
December 29 (4).................... 63,266 (473) (2,091) (0.28)
-------- ------- ------- ------
Total............................. $244,268 $ 3,926 $(2,422) $ (.32)
======== ======= ======= ======
- --------
(1) The sum of quarterly earnings per share amounts may differ from annual
earnings per share because of the differences in the weighted average number
of common shares in the quarterly and annual computations.
(2) The third quarter of 1995 includes a special charge for litigation (Note
11) of $10,000,000 before income tax benefit ($6,200,000 after income tax
benefit, or $0.83 per common share).
(3) The fourth quarter of 1995 includes the provision for loss on restaurant
closings and other property write-downs of $3,911,000 before income tax
benefit ($2,425,000 after income tax benefit, or $0.32 per common share).
(4) The fourth quarter of 1996 includes a special charge for litigation (Note
11) of $4,000,000 before income tax benefit ($2,480,000 after income tax
benefit, or $0.33 per common share).
F-19
No dealer, salesperson or any other person has been authorized to give any
information or make any representation in connection with the offer contained
herein, other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any security other than those to
which it relates nor does it constitute an offer to sell, or a solicitation of
an offer to buy, any security to any person in any jurisdiction in which such
offer or solicitation is not authorized, or in which the person making such
offer or solicitation is not qualified to do so, or to any person to whom it
is unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained herein is correct as
of any time subsequent to the date hereof.
---------------
Table of Contents
PAGE
----
Available Information..................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 15
The Exchange Offer........................................................ 20
The Acquisition........................................................... 27
Use of Proceeds of the Exchange Notes..................................... 28
Pro Forma Capitalization.................................................. 28
Unaudited Pro Forma Financial Information................................. 29
Selected Historical Consolidated Financial Information.................... 37
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 39
Description of Business................................................... 47
Management................................................................ 59
Security Ownership of Certain Beneficial Owners and Management of the
Company.................................................................. 61
Description of Capital Stock.............................................. 62
Description of Credit Facility............................................ 62
Description of the Notes.................................................. 63
Certain U.S. Federal Income Tax Considerations............................ 88
Plan of Distribution...................................................... 89
Legal Matters............................................................. 90
Experts................................................................... 90
Index to Consolidated Financial Statements ............................... F-1
$ 100,000,000
[LOGO OF KRYSTAL APPEARS HERE]
THE KRYSTAL COMPANY
OFFER TO EXCHANGE UP TO $100,000,000 OF ITS
10 1/4% NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR
AN EQUAL AGGREGATE PRINCIPAL AMOUNT OF ITS OUTSTANDING 10 1/4% SENIOR NOTES
DUE 2007
---------------
PROSPECTUS
---------------
, 1997
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 8 of the Company's charter provides as follows:
(a) A director of the corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for any breach of
fiduciary duty as a director except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its shareholders, (ii) for
acts or omissions not in good faith or which involved intentional misconduct
or a knowing violation of law or (iii) for distributions in violation of
Section 48-18-304 of the Tennessee Business Corporation Act. If the Tennessee
Business Corporation Act is amended after approval by the shareholders of this
article in order to authorize or permit corporate action further eliminating
or limiting the personal liability of directors, then the liability of a
director of the corporation shall be eliminated or limited to the fullest
extent permitted by the Tennessee Business Corporation Act, as so amended.
Any repeal or modification of the foregoing paragraph by the shareholders of
the corporation shall not adversely effect any right or protection of a
director of the corporation existing at the time of such repeal or
modification.
(b) Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative, and whether formal or
informal (hereinafter a "proceeding"), by reason of the fact that he or she is
or was a director, officer or employee of the corporation or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans
(hereinafter "indemnities") whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee or agent or in
any other capacity while serving as a director, officer, employee or agent,
shall be indemnified and held harmless by the corporation to the fullest
extent authorized by the Tennessee Business Corporation Act, as the same
exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the corporation to provide
broader indemnification rights than such law permitted the corporation to
provide prior to such amendment), against all judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement reasonably incurred or
suffered by such indemnities in connection therewith and such indemnification
shall continue as to an indemnitee who has ceased to be a director, officer or
employee and shall inure to the benefit of the indemnitee's heirs, executors
and administrators; provided, however, that, except as provided in Paragraph
8(c) hereof, with respect to proceedings to enforce a right to indemnification
hereunder, the corporation shall indemnify any such indemnitee in connection
with a proceeding (or part thereof) initiated by such indemnitee only if such
proceeding (or part thereof) was authorized by the Board of Directors of the
corporation. The right to indemnification conferred in this paragraph shall be
a contractual right and shall include the right to be paid by the corporation
the expenses incurred in defending a proceeding in advance of its final
disposition (hereinafter "advancement expenses"); provided, however, that, if
the Tennessee Business Corporation Act so requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a director, officer or
employee shall be made only upon (i) delivery of written affirmation of the
indemnitee's good faith belief that any applicable standard of conduct
required by Section 48-18-502 of the Tennessee Business Corporation Act, or
any successor provision, has been met; (ii) delivery of an undertaking, by or
on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal that such indemnitee is not entitled to be indemnified
for such expenses under this paragraph or otherwise (hereinafter an
"undertaking"); and (iii) a determination is made by those making the
determination that the facts then known to them would not preclude
indemnification under this charter or the Tennessee Business Corporation Act.
II-1
(c) If a claim under Paragraph 8(b) is not paid in full by the corporation
within sixty days after a written claim has been received by the corporation,
except in the case of a claim for an advancement of expenses, in which case
the applicable period shall be twenty days, the indemnitee may at any time
thereafter bring suit against the corporation to recover the unpaid amount of
the claim. If the indemnitee is successful in whole or in part in any such
suit or in any suit brought by the corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to also be paid the expenses of prosecuting or defending such a suit.
In any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to
an advancement of expenses) it shall be a defense that the indemnitee has not
met the applicable standard of conduct set forth in Section 48-18-502 or any
successor provision of the Tennessee Business Corporation Act. In any suit by
the corporation to recover an advancement of expenses pursuant to the terms of
an undertaking, the corporation shall be entitled to such expenses upon a
final adjudication that the indemnitee has not met the applicable standard of
conduct set forth in Section 48-18-502 or any successor provision of the
Tennessee Business Corporation Act. Neither the failure of the corporation
(including its Board of Directors, independent legal counsel or its
shareholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper under the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
Section 48-18-502 or any successor provision of the Tennessee Business
Corporation Act, nor an actual determination by the corporation (including its
Board of Directors, independent legal counsel or its shareholders) that the
indemnitee has not met such applicable standard of conduct, shall create a
presumption that the indemnitee has failed to meet the applicable standard of
conduct or be a defense to such suit. In any suit brought by the indemnitee to
enforce a right hereunder, or by the corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of proving that
the indemnitee is not entitled to indemnification or advancement of expenses
under Paragraph 8(b) or otherwise shall be on the corporation.
(d) The rights to indemnification and to advancement of expenses conferred
in Paragraph 8(b) shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, the corporation's Second
Amended and Restated Charter or Second Amended and Restated By-laws,
agreement, vote of shareholders or disinterested directors or otherwise. The
indemnitee's right to indemnification and advancement of expenses under
Paragraph 8(b) may but shall not be required to be evidenced by a separate
written agreement.
(e) The corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the corporation would
have the power to indemnify such person against such expense, liability or
loss under the Tennessee Business Corporation Act.
(f) The corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any agent of the corporation to the fullest extent permitted by
Paragraph 8(b) with respect to the indemnification and advancement of expenses
of directors, officers and employees of the corporation.
Article VII of its bylaws provides that the Company shall have the power to
indemnify its directors to the fullest extent permitted by (a) the charter of
the corporation or (b) if such charter provision is limited or eliminated by
amendment or otherwise, by Tennessee law.
Item 21. Exhibits and Financial Statement Schedules
See Index to Exhibits.
Item 22. Undertakings
The undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
II-2
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from
the low or high and of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(b) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the request.
(c) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when it
became effective.
(d) That insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act, undersigned registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Chattanooga, Tennessee on December
, 1997.
THE KRYSTAL COMPANY
/s/ Philip H. Sanford,
By: _________________________________
Philip H. Sanford,
Chairman and Chief
Executive Officer
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on December , 1997.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Philip H. Sanford Chairman and Chief Executive December , 1997
_________________________________ Officer Principal Executive
PHILIP H. SANFORD Officer
/s/ James F. Exum, Jr.* President, Chief Operating December , 1997
_________________________________ Officer and Director
JAMES F. EXUM, JR.
/s/ Clay H. Buckner, Jr.* Treasurer and Controller December , 1997
_________________________________ (Principal Financial and
CLAY H. BUCKNER, JR. Accounting Officer)
/s/ W.A. Bryan Patten* Director December , 1997
_________________________________
W. A. BRYAN PATTEN
/s/ Richard C. Patton* Director December , 1997
_________________________________
RICHARD C. PATTON
/s/ Benjamin R. Probasco* Director December , 1997
_________________________________
BENJAMIN R. PROBASCO
/s/ Philip H. Sanford
*By:____________________
Philip H. Sanford
Attorney-in-fact
II-4
INDEX TO EXHIBITS
EXHIBIT
NUMBER
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*1.1 Purchase Agreement, dated as of September 18, 1997, between TKC
Acquisition Corp. and UBS Securities, LLC.
**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.
5.1 Opinion and Consent of Miller & Martin regarding validity of the
Exchange Notes.
*10.1 Credit Agreement dated as of September 26, 1997 among TKC Acquisition
Corp., to be merged with and into The Krystal Company, SunTrust Bank,
Atlanta, as agent, and Union Bank of Switzerland, New York Branch, as
syndication agent.
21.1 Subsidiaries of the Company.
*23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Miller & Martin (included in Exhibit 5.1).
*24.1 Power of Attorney (included on signature page).
25.1 Statement of Eligibility and Qualification of SunTrust Bank, Atlanta.
***27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Exchange Agent Agreement between The Krystal Company and
SunTrust Bank, Atlanta.
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* Filed as an exhibit to Registration Statement on Form S-4 dated November
25, 1997.
** Incorporated by reference to the Proxy Statement of the Company filed with
the Commission on September 15, 1997.
*** Submitted only with the electronic filing of this document with the
Commission pursuant to Regulation S-T under the Securities Act.