10-Q 1 sept03-10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 or the quarterly period ended September 28, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period from to --------- -------- Commission file number 000-20040 --------------------------------- THE KRYSTAL COMPANY ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) TENNESSEE 62-0264140 --------- ---------- (State or other jurisdiction of (IRS Employer identification incorporation or organization) Number) One Union Square, Chattanooga, TN 37402 ----------------------------------------------------------------------------- (Address of principal executive offices, including zip code) (423) 757-1550 ----------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---- ---- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of The Exchange Act). YES NO X ---- ---- This report is filed by the Company pursuant to Section 15(d) of the Securities Exchange Act of 1934. The Company has 100 shares of common stock outstanding held of record by Port Royal Holdings, Inc. as of November 10, 2003. THE KRYSTAL COMPANY ------------------- September 28, 2003 ------------------ PART I. FINANCIAL INFORMATION ------------------------------ The condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the Company's latest annual report on Form 10-K. In the opinion of management of the Company, all normal and recurring adjustments necessary to present fairly (1) the financial position of The Krystal Company and Subsidiary as of September 28, 2003 and December 29, 2002, and (2) the results of their operations for the three and nine months ended September 28, 2003 and September 29, 2002 and (3) their cash flows for the nine months ended September 28, 2003 and September 29, 2002 have been included. The results of operations for the interim period ended September 28, 2003 are not necessarily indicative of the results for the full year. Certain written and oral statements made by or on behalf of the Company may constitute "forward-looking" statements as defined under the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). The PSLRA contains a safe harbor in making such disclosures. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company's historical experience and its present expectations or projections, including the following: any statements regarding future sales or expenses, any statements regarding the continuation of historical trends and any statements regarding the Company's future liquidity and capital resources needs. Without limiting the foregoing, the words "believe", "anticipates", "plans", "expects", and similar expressions are intended to identify forward-looking statements. These risks and uncertainties include, but are not limited to, unanticipated economic changes, interest rate movements, changes in governmental policies, the impact of competition, changes in consumer tastes, increases in costs for food and/or labor, the availability and adequate supply of hourly-paid employees, the ability of the Company to attract and retain suitable franchisees, the rate of growth of new franchise restaurant openings, the Company's ability to obtain funding sufficient to meet operational requirements and capital expenditures and the impact of governmental regulations. The Company cautions that such factors are not exclusive. Caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date of the making of such statements and are based on certain expectations and estimates of the Company which are subject to risks and changes in circumstances that are not within the Company's control. The Company does not undertake to update forward-looking statements other than as required by law. The information provided herein should be read in conjunction with information provided in the Company's Form 10-K for the fiscal year ended December 29, 2002. PART I. FINANCIAL INFORMATION ----------------------------- Item I. Financial Statements THE KRYSTAL COMPANY AND SUBSIDIARY ---------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- (In thousands) September 28, December 29, 2003 2002 --------- ---------- ASSETS (Unaudited) ------ CURRENT ASSETS: Cash and temporary investments $ 2,647 $ 10,690 Receivables, net 1,649 1,456 Inventories 2,299 1,783 Deferred income taxes 4,615 4,615 Prepayments and other 1,029 951 -------- -------- Total current assets 12,239 19,495 -------- -------- PROPERTY, BUILDINGS, AND EQUIPMENT, net 90,490 94,374 -------- -------- LEASED PROPERTIES, net 4,575 5,416 -------- -------- OTHER ASSETS: Goodwill 36,186 36,186 Deferred financing costs, net 1,329 1,851 Other 891 986 -------- -------- Total other assets 38,406 39,023 -------- -------- TOTAL ASSETS $145,710 $158,308 ======== ======== See accompanying notes to consolidated condensed financial statements. THE KRYSTAL COMPANY AND SUBSIDIARY ---------------------------------- CONSOLIDATED BALANCE SHEETS (CONTINUED) --------------------------------------- (In thousands) September 28, December 29, 2003 2002 LIABILITIES AND SHAREHOLDER'S EQUITY ----------- ---------- ------------------------------------ (Unaudited) CURRENT LIABILITIES: Accounts payable $ 3,813 $ 5,505 Accrued liabilities 24,448 22,102 Current portion of long-term debt 1,193 1,250 Current portion of capital lease obligations 690 1,042 -------- -------- Total current liabilities 30,144 29,899 -------- -------- LONG-TERM DEBT, excluding current portion 60,980 73,688 -------- -------- CAPITAL LEASE OBLIGATIONS, excluding current portion 4,861 5,384 -------- -------- DEFERRED INCOME TAXES 7,700 9,392 -------- -------- OTHER LONG-TERM LIABILITIES 9,447 7,825 -------- -------- SHAREHOLDER'S EQUITY: Common stock, without par value; 100 shares authorized, issued and outstanding at September 28, 2003, and at December 29, 2002 35,000 35,000 Accumulated other comprehensive loss ( 6,524) ( 6,524) Retained earnings 4,102 3,644 -------- -------- Total shareholder's equity 32,578 32,120 -------- -------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $145,710 $158,308 ======== ======== See accompanying notes to consolidated condensed financial statements.

THE KRYSTAL COMPANY AND SUBSIDIARY ---------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (In thousands) (Unaudited) For The Nine Months Ended ---------------------------- Sept. 28, Sept. 29, 2003 2002 --------- --------- OPERATING ACTIVITIES: Net income $ 458 $ 5,986 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 8,427 8,332 Change in deferred taxes ( 1,692) ( 1,441) Gain on extinguishment of debt 533 ( 4,655) Gain on sale of assets ( 45) 58 Loss on impairment of asset -- 496 Changes in operating assets and liabilities: Receivables, net ( 193) ( 172) Inventories ( 70) 384 Prepayments and other ( 78) ( 180) Accounts payable ( 1,692) ( 1,349) Accrued liabilities 2,346 3,973 Other, net 2,069 1,410 -------- -------- Net cash provided by operating activities 10,063 12,842 -------- -------- INVESTING ACTIVITIES: Additions to property, buildings, and equipment ( 6,225) ( 7,118) Proceeds from sale of property, buildings, and equipment 2,292 23,729 -------- ------- Net cash (used in) provided by investing activities ( 3,933) 16,611 -------- ------- FINANCING ACTIVITIES: Net payments under revolving credit facility (13,298) ( 4,979) Repayments of long-term debt -- (25,377) Principal payments of capital lease obligations ( 875) ( 3,573) -------- ------- Net cash used in financing activities (14,173) (33,929) -------- -------- NET DECREASE IN CASH AND TEMPORARY INVESTMENTS ( 8,043) ( 4,476) CASH AND TEMPORARY INVESTMENTS, beginning of period 10,690 13,042 --------- ------- CASH AND TEMPORARY INVESTMENTS, end of period $ 2,647 $ 8,566 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 4,156 $ 5,991 ======= ======= Income taxes $ 1,543 $ 2,248 ======= ======= See accompanying notes to consolidated condensed financial statements. THE KRYSTAL COMPANY AND SUBSIDIARY ---------------------------------- NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) ---------------------------------------------------------------- A. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Activities -- The Krystal Company ("Krystal") (a Tennessee corporation) is engaged primarily in the development, operation and franchising of quick-service restaurants in the Southeastern United States. The Company recognizes revenues from restaurant sales upon delivery of the product to the customer. The Company sold substantially all of the assets of the Company's fixed base operation in Chattanooga, Tennessee ("Aviation") on October 17, 2002. The sales price was $10.8 million and resulted in a gain on the sale of $2.1 million, net of tax. The operating results of Aviation are classified as discontinued operations, net of taxes. Principles of Consolidation -- The accompanying consolidated financial statements include the accounts of Krystal and its subsidiary (hereinafter referred to collectively as "the Company"). All significant intercompany balances and transactions have been eliminated. Cash and temporary investments -- The Company considers repurchase agreements and other temporary cash investments with a maturity of three months or less to be temporary investments. Accounts Receivable and the Allowance for Doubtful Accounts -- Accounts receivable arise primarily from franchise fees, royalties owed by franchisees and sales of products to franchisees. The Company evaluates the collectibility of accounts receivable based on reviews of its customer's ability to meet its financial obligations or as a result of changes in the overall aging of accounts receivable. While the Company has a large customer base that is geographically dispersed, a general economic downturn could result in higher than expected defaults and, therefore, the need to revise estimates for bad debts. The Company generally does not require collateral for accounts receivable. Franchise and License Agreements -- Franchise or license agreements are available for single Krystal restaurants and multi-unit development agreements are available for the development of several Krystal restaurants over a specified period of time. The multi-unit development agreement establishes the number of restaurants the franchisee or licensee is to construct and open in the franchised area during the term of the agreement. At September 28, 2003, there were 175 franchised or licensed restaurants and at September 29, 2002, there were 177 franchised or licensed restaurants. Franchisees and licensees are required to pay the Company an initial franchise or license fee plus a weekly royalty and service fee of 4.5% to 6.0% of the restaurants' gross receipts, depending on the duration of the franchise agreement. The initial franchise and license fees are recorded as income when the related restaurants begin operations. Royalty and service fees, which are based on restaurant sales of franchisees and licensees, are recognized as earned. Franchise fees received prior to the opening of the restaurant are deferred and included in accrued liabilities on the consolidated balance sheet. At September 28, 2003 and September 29, 2002, total deferred franchise and license fees were approximately $712,500 and $958,500, respectively. Advertising -- The Company incurs expenditures for television, radio and print advertising to support its products. This advertising maintains the important brand franchise with the consuming public. The Company allocates a percentage of the necessary supporting advertising expenses to each dollar of sales by charging a percentage of sales on an interim basis based upon anticipated annual sales and advertising expenditures (in accordance with Accounting Principles Board Opinion No. 28) and adjusting that accrual to the actual expenses incurred at the end of the year. Fair Market Value of Financial Instruments -- The carrying amount reflected in the consolidated balance sheets for cash and temporary investments, accounts receivable and accounts payable approximate their respective fair values based on the short-term nature of these instruments. Benefit Plans -- The determination of obligations and expenses under the Company's retirement and post retirement benefit plans is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include among others, the discount rate, expected return on plan assets and the expected rates of increase in employee compensation and health care costs. In accordance with accounting principles generally accepted in the United States, actual results that differ from assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense and the recorded obligation in such periods. Significant differences in actual experience or significant changes in the assumptions used may materially affect the pension and post retirement obligations and future expenses. Subsequent to September 28, 2003, the Company amended its retirement plan to eliminate future accrual of additional pension benefits for active employees. The amendment, which was effective September 30, 2003, resulted in a curtailment gain of $1.7 million and an increase in the additional minimum pension liability of $3.1 million. Accumulated other comprehensive income increased to $8.5 million, net of taxes. The curtailment gain and adjustment to additional minimum pension liability will be recorded in the Company's fiscal fourth quarter ending December 28, 2003. Effective with the change in the retirement plan, the Company established a defined contribution employee benefit plan subject to IRS code 401(k). This plan covers substantially all employees of the Company. Participants may contribute a percentage of their compensation as allowed under applicable laws. The plan provides for a matching contribution of up to 3.0% of the employees' salary by the Company. Participants are 100% vested in participant contributions and become vested in Company matching contributions over a period of six years. Accumulated Other Comprehensive Loss -- Accumulated other comprehensive loss is comprised of a minimum pension liability of $6.5 million, net of taxes, at December 29, 2002 and September 28, 2003. Effective September 30, 2003, the Company's fourth fiscal quarter of 2003, accumulated other comprehensive loss will increase to $8.5 million, net of taxes. Stock Compensation -- On July 30, 1998, the Board of Directors of Port Royal Holdings, Inc. authorized a nonqualified Incentive Stock Option Plan (the "Plan") for key employees of the Company and its subsidiary. The Plan is administered by the Compensation Committee (the "Committee") of the Board of Directors. Under the Plan, the Committee may grant options of up to 1,000,000 shares of Port Royal common stock. The Committee granted 700,000 options in 1998, of which 100,000 vest ratably over 5 years and the remaining 600,000 vest in 2007. These 700,000 options also contain a vesting acceleration provision if the Company achieves certain cash flow targets. The acceleration provisions resulted in 75,000 options becoming vested in 1999 and 2000. No options became vested under the acceleration provisions during the Company's first three fiscal quarters of 2003 or during fiscal 2002. No options were granted or exercised during the Company's first three fiscal quarters of 2003 or during fiscal 2002. During the quarter ended September 28, 2003, 100,000 previously granted options were forfeited and cancelled following the termination of employment of a former option holder. The fair value of each option grant has been estimated as of the date of the grant using the minimum value option pricing model because there is no established fair market value of Port Royal stock as it is not available on the open market. The following weighted average assumptions were used for fiscal year 1998 grants: expected dividend yield of 0%, a risk-free interest rate of 5.49% and expected life of 10 years. Using these assumptions, the fair value of the employee stock options granted in 1998 is $1,303,000, which would be amortized as compensation expense over the vesting period of the options, if the Company had elected to expense such options in accordance with SFAS 123. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Since the options to acquire Port Royal stock were granted at fair value, no compensation expense has been recorded under APB 25. The following table illustrates the effect on net income if the fair value method had been applied to all outstanding and unvested options and awards in each period. The three months ended The nine months ended ---------------------- --------------------- Sept. 28, Sept. 29, Sept. 28, Sept. 29, 2003 2002 2003 2002 -------- -------- -------- -------- (In thousands) Net Income (Loss): As reported $ ( 91) $ 621 $ 458 $ 5,986 Stock compensation expense ( 16) ( 25) ( 51) ( 75) ------- ------- ------- ------- Pro forma $ ( 107) $ 596 $ 407 $ 5,911 ======= ======= ======= ======= Use of Estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the differences could be material. B. RECENT ACCOUNTING PRONOUNCEMENTS - In April 2002, FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections",("SFAS 145"). Among other things, SFAS 145 rescinds Statement of Financial Accounting Standards No. 4, "Reporting Gains and Losses from Extinguishment of Debt" , which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in Accounting Principles Board Opinion No. 30 will now be used to classify those gains and losses. The provisions of SFAS 145 are effective for financial statements issued for fiscal years beginning after May 15, 2002, and interim periods within those fiscal years. During fiscal 2002, prior to the required adoption of SFAS 145, the Company reported extraordinary gains aggregating $5.0 million associated with the extinguishment of the Company's debt. Under SFAS 145, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods that does not meet the criteria in APB 30 for classification as an extraordinary item shall be reclassified. The Company adopted SFAS 145 on December 30, 2002. Accordingly, the extraordinary gains reported in 2002 have been reclassified. On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock- Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148, which was adopted by the Company on December 30, 2002, amends SFAS 123 and Accounting Principles Board Opinion No. 28, "Interim Financial Reporting", to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income in annual and interim financial statements. The adoption of this pronouncement did not have an impact on our results of operations, financial position or cash flows. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires an entity to disclose in its interim and annual financial statements information with respect to its obligations under certain guarantees that it has issued. It also requires an entity to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002. The Company is not party to any guarantees as of December 29, 2002. The initial recognition and measurement requirements of FIN 45 are effective prospectively for guarantees issued or modified after December 31, 2002. Based on the Company's current activities, management does not believe that the recognition requirements will have a material impact on the Company's financial position, cash flows or results of operations. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. The adoption of this pronouncement is not expected to have an impact on the Company's financial statements. In January 2003, the Emerging Issues Task Force of the FASB issued EITF Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"). EITF 02-16 addresses accounting and reporting issues related to how a reseller should account for cash consideration received from vendors. Generally, cash consideration received from vendors is presumed to be a reduction of the prices of the vendor's products or services and should, therefore, be characterized as a reduction of cost of sales when recognized in the customer's income statement. However, under certain circumstances, this presumption may be overcome and recognition as revenue or as a reduction of other costs in the income statement may be appropriate. The Company adopted the provisions of EITF 02-16 in fiscal 2002. The adoption of this pronouncement did not have an impact on our results of operations, financial position or cash flows. C. SEGMENT REPORTING The Company operates in two defined reportable segments: restaurants and franchising. The restaurant segment consists of the operations of all Company-owned restaurants and derives its revenues from retail sales of food products to the general public. The franchising segment consists of franchise sales and support activities and derives its revenues from fees related to the sales of franchise and development agreements and collection of royalties from franchisees of the Krystal brand. All of the Company's revenues are derived within the United States. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies. Segment information is as follows: For the Nine Months Ended ------------------------------------------------------------------------------ September 28, September 29, (in thousands) 2003 2002 ------------------------------------------------------------------------------ Revenues: Restaurants $177,440 $185,492 Franchising 6,010 5,877 ----------------------------------------------------------------------------- Total segment revenues $183,450 $191,369 ============================================================================= Depreciation and Amortization: Restaurants $ 8,361 $ 7,964 Franchising 2 3 ----------------------------------------------------------------------------- Total segment depreciation and amortization $ 8,363 $ 7,967 ============================================================================= Interest expense: Restaurant $ 6,054 $ 7,253 Franchising 0 0 ----------------------------------------------------------------------------- Total segment interest expense $ 6,054 $ 7,253 ============================================================================= September 28, December 29, 2003 2002 ----------------------------------------------------------------------------- Capital Expenditures: Restaurants $ 6,225 $ 9,740 Franchising 0 0 ----------------------------------------------------------------------------- Total segment capital expenditures $ 6,225 $ 9,740 ============================================================================= Total Assets: Restaurants $141,997 $153,083 Franchising 2,160 2,043 ----------------------------------------------------------------------------- Total segment assets $144,157 $155,126 ============================================================================= A reconciliation of segment depreciation and amortization to consolidated depreciation and amortization is as follows: ------------------------------------------------------------------------------- September 28, September 29, 2003 2002 ------------------------------------------------------------------------------- Segment depreciation and amortization $ 8,363 $ 7,967 Unreported segments (1) 64 225 ------------------------------------------------------------------------------- Total consolidated depreciation and amortization $ 8,427 $ 8,192 =============================================================================== A reconciliation of segment total assets to consolidated total assets is as follows: ------------------------------------------------------------------------------- September 28, December 29, 2003 2002 ------------------------------------------------------------------------------- Total segment assets $144,157 $155,126 Unreported segments (1) 1,553 3,182 ------------------------------------------------------------------------------- Total consolidated assets $145,710 $158,308 =============================================================================== (1) Unreported segments do not meet the quantitative thresholds for segment reporting. D. INDEBTEDNESS Senior Secured Credit Agreement-- 0n June 30,2003, the Company amended its existing $25.0 million credit agreement (the "Credit Facility"). The amended the Credit Facility, which provides for borrowing up to $25.0 million, is made up of $19.85 million in available credit and $5.15 million in outstanding letters of credit. The amendment eliminated the term loan feature and modified certain other terms and conditions. The existing term loan balance at September 28, 2003 was repaid in full with an initial borrowing under the line of credit. The prepayment of the $13.3 million term loan portion resulted in a prepayment penalty of $533,000 and the retirement of $164,000 of deferred financing costs, which were charged to expense in the quarter ended September 28, 2003. The amended Credit Facility matures June 29, 2004. Borrowings under the amended Credit Facility bear interest rates, at the option of the Company, and depending on the certain financial covenants, equal to either (a) the greater of the prime rate, or the federal funds rate plus 0.5%, plus a margin (which ranges from 0.00% to 1.0%) or (b) the rate offered in the Eurodollar market for amounts and periods comparable to the relevant loan, plus a margin (which ranges from 1.50% to 2.75% and is determined by certain financial covenants. The amended Credit Facility contains restrictive covenants including, but not limited to (a) the Company's required maintenance of a minimum amount of tangible net worth; (b) the Company's required maintenance of certain levels of funded debt coverage; (c) limitations regarding additional indebtedness; (d) the Company's required maintenance of a minimum amount of fixed charges coverage; (e) limitations regarding consolidated capital expenditures and (f) limitations regarding liens on assets. The Company was in compliance with all covenants at September 28, 2003. Essentially all assets of the Company are pledged as collateral on the Credit Facility. Additionally, the Credit Facility is guaranteed by Port Royal through a secured pledge of all of the Company's common stock held by Port Royal and the common stock of each existing and future subsidiary of the Company. Senior Notes-- In September 1997, the Company issued $100.0 million in unsecured 10.25% senior notes ("the Notes") which mature on October 1, 2007. The Notes pay interest semi-annually on April 1 and October 1 of each year. The Notes are redeemable at the option of the Company at prices decreasing from 105 1/8% of the principal amount on April 1, 2002 to 100% of the principal amount on April 1, 2005. Additionally, upon a change of control of the Company, the holders of the Notes will have the right to require the Company to purchase all or a portion of the Notes at a price equal to 101% of the original principal amount. The proceeds of the Notes were used to fund the acquisition of the Company by Port Royal. During fiscal 2002, the Company purchased and retired $39.0 million aggregate par value of its Notes. The retirement of the Notes resulted in a gain of $3.0 million, net of taxes. E. COMMITMENTS AND CONTINGENCIES The Company is a party to various legal proceedings incidental to its business. The ultimate disposition of these matters is not presently determinable but will not, in the opinion of management and the Company's legal counsel, have a material adverse effect on the Company's financial condition or results of operations. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements of the Company (including the notes thereto) contained elsewhere in this report. The following table reflects certain key operating statistics which impact the Company's financial results:

Comparison of the Three Months Ended September 28, 2003 ------------------------------------------------------- to the Three Months Ended September 29, 2002 -------------------------------------------- RESULTS OF OPERATIONS --------------------- Total system wide Krystal restaurant sales, which included restaurant sales of $60.9 million for Company-owned units and $38.4 million for franchised units, for the three months ended September 28, 2003 increased 0.9% to $99.3 million compared to $98.3 million for the same period in 2002. Total Company revenues decreased $0.5 million to $63.0 million in the three months ended September 28, 2003 compared to the same period in 2002. The decrease was primarily due to a $0.7 million decrease in restaurant sales. The decrease in restaurant sales was primarily due to operating one fewer restaurant and a 0.84% decrease in same restaurant sales for the period. The Company operated 245 restaurants at September 28, 2003 compared to 246 restaurants at September 29, 2002. Company-owned same restaurant sales decreased 0.84%, compared to the same period in 2002. The decrease was primarily attributable to a decrease in restaurant volume for the three months ended September 28, 2003 compared to the same period in 2002. The average customer check for Company owned restaurants was $4.76 for the three months ended September 28, 2003 compared to $4.77 for the same period in 2002. Franchise fee income was $290,000 in the three months ended September 28, 2003 compared to $257,000 for the same period in 2002. Franchise fees are recorded upon the opening of franchise restaurants. Franchise fees are also recorded upon the transfer, extension, renewal or default of franchise agreements. The Company's franchisees opened two and five franchised restaurants in the three months ended September 28, 2003 and September 29, 2002, respectively. The Company recognized $225,000 in franchise fees upon termination of a multi-unit development agreement. Royalty revenue increased 7.3% to $1.8 million in the three months ended September 28, 2003 from $1.7 million in the same period in 2002. The increase in royalty revenue, which is earned based on a percentage of sales by franchise restaurants, was due to a 4.3% increase in franchise restaurant sales resulting from an increase in the number of franchise restaurants days in operation. The franchise system had 16,822 restaurant days for the three months ended September 28, 2003 compared to 15,936 restaurant days for the same period in 2002. Restaurant days are calculated by taking the total number of franchise restaurants open during the period times the number of days each one was open during the period. Cost of restaurant sales was $50.9 million for the three months ended September 28, 2003 compared to $50.3 million for the same period in 2002. Food and paper costs as a percent of restaurant sales increased to 30.4% in the three months ended September 28, 2003 from 29.8% in the same period in 2002. The increase in food and paper costs as a percent of restaurant sales resulted primarily from increases in beef prices offset somewhat by 0.43% menu price increases. Direct labor as a percent of restaurant sales decreased to 21.64% for the three months ended September 28, 2003 from 22.05% for the same period in 2002. Average hourly wage was $6.25 for the three months ended September 28, 2003 and $6.29 for the same period in 2002. Advertising expense decreased 1.1% to $2.56 million in the three months ended September 28, 2003 from $2.59 million in the same period in fiscal 2002. Advertising expense was accrued based on 4.2% of restaurant sales and will vary with the volume of such sales. Depreciation and amortization expenses increased $45,000, or 1.6%, to $2.8 million in the three months ended September 28, 2003 compared to the same period in 2002. General and administrative expenses for the three months ended September 28, 2003 were $4.6 million compared to $4.8 million for the same period in fiscal 2002. The decrease resulted primarily from the elimination of accruals for the Company's management incentive plan, offset by an increase in expense associated with the Company's defined and postretirement benefit plans and employee severance expenses. The increase in expense associated with the defined benefit plan resulted from the impact of lower investment returns and lower interest rates assumed in the actuarial valuation performed in fiscal 2002. In the three months ended September 28, 2003, the Company's performance failed to meet the criteria for payment of management incentive bonuses and, accordingly, no provision was made for such bonuses. Other income (expense) increased $492,000 or 130.8%, to income of $116,000 in the three months ended September 28, 2003 compared to an expense of $376,000 in the same period in 2002. This change resulted from impairment expenses of $496,000 recorded in the three months ended September 29, 2002. No impairment expense was recorded in the third quarter of 2003. The Company recognized a $533,000 loss on extinguishment of debt in the three months ended September 28, 2003 that resulted from the amendment and restatement of the credit agreement dated June 30, 2003. The Company recorded a gain of $280,000 in the three months ended September 29, 2002 that resulted from the retirement of a portion of the Company's 10.25% Senior Notes. Interest expense, net of interest income, decreased $290,000 to $2.0 million in the three months ended September 28, 2003 from $2.3 million in the same period in 2002. This decrease resulted primarily from the Company's retirement of $12.0 million of the Notes during the last three quarters of 2002, a $4.2 million reduction in its capital lease obligations in the last three quarters of 2002 and the first three quarters of 2003 and lower borrowings under its Credit Facility during the quarter ended September 28, 2003. The Company's income tax expense from continuing operations decreased for the three months ended September 28, 2003 by $402,000, to a benefit of $233,000 from an expense of $169,000 in the same period in 2002. The effective income tax rate increased to 71.9% in the three months ended September 28, 2003 from 31.0% in the same period in 2002 reflecting the effect of permanent differences and tax credits. Comparison of the Nine Months Ended September 28, 2003 ------------------------------------------------------ to the Nine Months Ended September 29, 2002 ------------------------------------------- RESULTS OF OPERATIONS --------------------- Total system wide Krystal restaurant sales, which included restaurant sales of $177.4 million for Company-owned units and $110.4 million for franchised units, for the nine months ended September 28, 2003 decreased 1.7% to $287.8 million compared to $292.8 million for the same period in 2002. Total Company revenues decreased $7.9 million to $183.5 million in the nine months ended September 28, 2003 compared to the same period in 2002. The decrease resulted from a $8.1 million decrease in restaurant sales. The decrease in restaurant sales was primarily due to operating one less restaurant and a 4.1% decrease in same restaurant sales for the period. The Company operated 245 restaurants at September 28, 2003 compared to 246 restaurants at September 28, 2002. Company-owned same restaurant sales decreased 4.1%, compared to the same period in 2002. The decrease was primarily attributable to a decrease in restaurant volume for the nine months ended September 28, 2003 compared to the same period in 2002. The average customer check for Company owned restaurants was $4.73 for the nine months ended September 28, 2003 compared to $4.74 for the same period in 2002. Franchise fee income was $768,000 in the nine months ended September 28, 2003 compared to $854,000 in the same period in 2002. Franchise fees are recorded upon opening of franchise restaurants. Franchise fees are also recorded upon the transfer, extension, renewal or default of franchise agreements. The Company's franchisees opened 14 franchised restaurants in the nine months ended September 28, 2003 and they opened 17 during the same period in 2002. The decrease in franchise fees in the nine months ended September 28, 2003 related primarily to fewer openings and transfers and extensions of franchise agreements than in same period of 2002. Royalty revenue increased 4.4% to $5.2 million in the nine months ended September 28, 2003 from $5.0 million in the same period in 2002. The increase in royalty revenue, which is earned based on a percentage of sales by franchise restaurants, was due primarily to a 2.9% increase in franchise restaurant sales resulting from an increase in the number of franchise restaurants days in operation. The franchise system had 49,823 restaurants days for the nine months ended September 28, 2003 compared to 46,703 restaurant days for the same period in 2002. Restaurant days are calculated by taking the total number of franchise restaurants open during the period times the number of days each one was open during the period. Cost of restaurant sales was $147.1 million for the nine months ended September 28, 2003 compared to $150.4 million for the same period in 2002. Food and paper costs as a percent of restaurant sales decreased to 29.8% in the nine months ended September 28, 2003 from 29.9% in the same period in 2002. The decrease in food and paper costs as a percent of restaurant sales resulted primarily from menu price increases amounting to 0.43%. Direct labor as a percent of restaurant sales decreased to 21.8% for the nine months ended September 28, 2003 from 21.9% for the same period in 2002, due in part to a decrease in the average hourly wage rate. Average hourly wage decreased 0.2% to $6.28 for the nine months ended September 28, 2003 from $6.29 for the same period in 2002. Advertising expense decreased 4.3% to $7.5 million in the nine months ended September 28, 2003 from $7.8 million in the same period in fiscal 2002. Advertising expense was accrued based on 4.2% of restaurant sales and will vary with the volume of such sales. Depreciation and amortization expenses increased $235,000, or 2.9%, to $8.4 million in the nine months ended September 28, 2003 compared to the same period in 2002. General and administrative expenses for the nine months ended September 28, 2003 were $14.0 million compared to $14.3 million for the same period in fiscal 2002. The decrease resulted primarily from an increase of approximately $1.2 million in expense associated with the Company's defined and postretirement benefit plans offset by the elimination of approximately $1.2 million in accruals for the Company's management incentive plan. The increase in expense associated with the defined benefit plan resulted from the impact of lower investment returns and lower interest rates assumed in the actuarial valuation performed in fiscal 2002. In the first nine months of 2003, the Company's performance failed to meet the criteria for payment of management incentive bonuses and, accordingly, no provision was made for such bonuses. In the first nine months of 2002, the Company's year-to-date performance warranted the accrual of such bonuses. Other income (expense) increased $495,000 or 383.7%, to income of $366,000 in the nine months ended September 28, 2003 compared to expense of $129,000 in the same period in 2002. This change resulted from an asset impairment charge of $496,000 recorded in the third quarter of 2002. The Company recognized a $45,000 gain on sale of assets for the nine months ended September 28, 2003 as a result of sales of non-operating properties. The Company recognized a $533,000 loss on extinguishment of debt in the nine months ended September 28, 2003 that resulted from the amendment of the Company's restated Credit Facility compared to a $4.7 million gain in the same period in 2002 that resulted from the retirement of a portion of the Company's 10.25% Senior Notes. Interest expense, net of interest income, decreased $1.2 million to $6.0 million in the nine months ended September 28, 2003 from $7.2 million in the same period in 2002. This decrease resulted primarily from the Company's retirement of $12.0 million of the Notes during the last three quarters of 2002, a $4.0 million reduction in its capital lease obligations in the last three quarters of 2002 and first three quarters of 2003 and lower borrowings under its Credit Facility during the first nine months of 2003. The Company's income tax expense from continuing operations decreased for the nine months ended September 28, 2003 by $2.7 million, to a $96,000 benefit from expense of $2.6 million in the same period in 2002. The effective income tax rate decreased to 26.5% in the nine months ended September 28, 2003 from 33.2% in the same period in 2002 reflecting the effects of permanent differences and tax credits. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company does not maintain significant inventories or accounts receivables since substantially all of its restaurants' sales are for cash. Royalties from franchisees, which are payable weekly, and other receivables from franchisees are closely monitored by the Company. The Company typically receives several weeks of trade credit in purchasing food and supplies which is standard in the restaurant business. The Company normally operates with working capital deficits (current liabilities exceeding current assets) and had a working capital deficit of $17.9 million at September 28, 2003, compared to a working capital deficit of $10.4 million at December 29, 2002. The increase in the deficit relates primarily to the use of cash to repay debt. Capital expenditures totaled approximately $6.2 million in the nine months ended September 28, 2003, as compared to $7.1 million in the same period in 2002. The Company opened no new restaurants during the three months ended September 28, 2003 or September 29, 2002. Management estimates that capital expenditures will be approximately $3.1 million during the remainder of 2003. Capital expenditures for the remainder of the current year are expected to include the refurbishment and remodeling of certain restaurants and ongoing capital improvements. 0n June 30,2003, the Company amended its existing $25.0 million credit agreement (the "Credit Facility"). The amended the Credit Facility, which provides for borrowing up to $25.0 million, is made up of $19.85 million in available credit and $5.15 million in outstanding letters of credit. The amendment eliminated the term loan feature and modified certain other terms and conditions. The existing term loan balance at September 28, 2003 was repaid in full with an initial borrowing under the line of credit. The prepayment of the $13.3 million term loan portion resulted in a prepayment penalty of $533,000 and the retirement of $164,000 of deferred financing costs, which were charged to expense in the quarter ended September 28, 2003. The amended Credit Facility matures June 29, 2004. During the quarter ended March 31, 2002, the Company entered into a real estate sale and leaseback transaction in which it sold the commercial real estate and improvements of 32 company operated restaurant locations to an unaffiliated third party and leased the properties back for a period of 20 years. Proceeds from this transaction of approximately $23.3 million, net of expenses of approximately $1.0 million, were primarily used to purchase a portion of the Company's 10.25% Senior Notes during fiscal 2002. At September 28, 2003, the Company had available cash of approximately $2.6 million, receivables of $1.6 million, and $19.7 million available under the Company's line of credit. In the opinion of management, these funds and funds from operations will be sufficient to meet operating requirements, anticipated capital expenditures and other obligations for the foreseeable future. Critical Accounting Policies -- The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. The following are critical accounting matters which are both very important to the portrayal of the Company's financial condition and results and which require some of management's most subjective and complex judgments. The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions which, in management's judgment, could change in a manner that would materially affect management's future estimates with respect to such matters and, accordingly, could cause future reported financial condition and results to differ materially from financial results reported based on management's current estimates. Accounts Receivable. The Company performs ongoing credit evaluations of its franchisees based upon payment history and the franchisees current credit worthiness. The Company continuously monitors collections from franchisees and maintains a provision for estimated credit losses based upon its review of franchisee financial condition and other relevant franchisee specific credit information. While such credit losses have historically been within the Company's expectations and the provisions established, it is possible that its credit loss rates could be higher or lower in the future. Impairment of Long-Lived Assets and Goodwill. The Company periodically evaluates fixed assets and goodwill for indicators of potential impairment. The Company's judgments regarding potential impairment are based on legal factors, market conditions and operational performance. Future events could cause the Company to conclude that assets associated with a particular operation are impaired. Evaluating the extent of an impairment also requires the Company to estimate future operating results and cash flows which also require judgment by management. Any resulting impairment loss could have a material adverse impact on the Company's financial condition and results of operations. Self-Insurance. The Company is self-insured for the majority of its group health insurance costs, workers' compensation insurance costs, and general liabilities subject to specific retention levels. Benefits administrators assist the Company in evaluating claims data to determine the liability for self-insured claims. While the Company's management believes that its assumptions are appropriate, significant differences in actual experience or significant changes in the Company's assumptions may materially affect these self insured costs. Accounting for Income Taxes. As part of the process of preparing the Company's consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves the Company estimating its actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company's consolidated balance sheet. While the Company's management believes that its assumptions are appropriate, significant differences in its actual experience or significant changes in its assumptions may materially affect the Company's income tax expense. Pension and Other Post-retirement Benefits. The determination of the Company's obligation and expense for pension and other post-retirement benefits is dependent on its selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are disclosed in Note 6 to the 2002 consolidated financial statements and include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation levels and health care costs. These assumptions are periodically adjusted based on management's judgement and consultations with actuaries and others. In accordance with accounting principles generally accepted in the United States, actual results that differ from the Company's assumptions are accumulated and amortized over future periods and, therefore, generally affect its recognized expense, recorded obligation and funding requirements in future periods. While the Company's management believes that its assumptions are appropriate, significant differences in its actual experience or significant changes in its assumptions may materially affect its pension and other post-retirement benefit obligations and its future expense. Franchise Revenue Recognition. The Company recognizes revenues related to Franchise fees when the related stores are opened. Changes in the timing of planned store openings and defaults on agreements can have a material impact on the timing of the recognition of such revenues. Item 3. Quantitative and qualitative disclosures about market risks Our market risk is limited to fluctuations in interest rates as it pertains to our borrowings under our Credit Facility. Borrowings under the amended Credit Facility bear interest rates, at the option of the Company, and depending on certain financial covenants, equal to either (a) the greater of the prime rate, or the federal funds rate plus 0.5%, plus a margin (which ranges from 0.25% to 2.0%) or (b) the rate offered in the Eurodollar market for amounts and periods comparable to the relevant loan, plus a margin (which ranges from 1.75% to 3.5% and is determined by certain financial covenants). If the interest rates on our borrowings average 100 basis points (1.0%) more in fiscal 2003 than they did in fiscal 2002, our interest expense would increase and income before income taxes would decrease by approximately $100,000. This amount is determined solely by considering the impact of the hypothetical change in the interest rate on our borrowing cost without consideration for other factors such as actions management might take to mitigate its exposure to interest rate changes. The Company is also exposed to the impact of commodity price fluctuations related to unpredictable factors such as weather and various other market conditions outside its control. From time to time, the Company enters into commodity futures and option contracts to manage these fluctuations. The Company had no futures and options contracts as of September 28, 2003. Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings under the Exchange Act. (b) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect such controls, except that the Company has implemented an additional required approval of the Chief Executive Officer's expenses. PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is party to various legal proceedings incidental to its business. The ultimate disposition of these matters is not presently determinable but will not, in the opinion of management, have a material adverse effect on the Company's financial condition or results of operations. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits- Rule 13a-14(a) certifications of Chief Executive Officer and Chief Financial Officer. (Exhibits 31.1 and 31.2) Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Exhibit 32) (b) Reports on Form 8-K- On July 28, 2003, Form 8-K was filed announcing the resignation of the Company's Chairman of the Board and Chief Executive Officer. THE KRYSTAL COMPANY AND SUBSIDIARY ---------------------------------- SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE KRYSTAL COMPANY (Registrant) Dated: November 6, 2003 /s/Larry D. Bentley ----------------------- ------------------------ Larry D. Bentley (Senior Vice President, Chief Financial Officer and Principal Accounting Officer) EXHIBIT INDEX ------------------------------------------------------------------------------- Exhibit No. Description of Exhibit ----------- ---------------------- 31.1 Rule 13a-14(a) certification of Chief Executive Officer 31.2 Rule 13a-14(a) certification of Chief Financial Officer 32 Certification pursuant to 18 U.S.C. Section 1350, as as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. EXHIBIT 31.1 ------------ CERTIFICATION OF CHIEF EXECUTIVE OFFICER ---------------------------------------- I, James F. Exum, Jr. Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Krystal Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 10, 2003 /s/James F. Exum, Jr. --------------------------- James F. Exum, Jr., Chief Executive Officer EXHIBIT 31.2 ------------ CERTIFICATION OF CHIEF FINANCIAL OFFICER ---------------------------------------- I, Larry D. Bentley, Vice President and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Krystal Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 10, 2003 /s/Larry D. Bentley ----------------------- Larry D. Bentley, Senior Vice President and Chief Financial Officer Exhibit No. 32 -------------- CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of The Krystal Company, a Tennessee corporation (the "Company"), does hereby certify, to such officer's knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended September 28, 2003 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 10, 2003 /s/James F. Exum, Jr. ------------------------------------- James F. Exum, Jr. Chief Executive Officer Dated: November 10, 2003 /s/Larry D. Bentley ------------------------------------- Larry D. Bentley Senior Vice President and Chief Financial Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to The Krystal Company and will be retained by The Krystal Company and furnished to the Securities and Exchange Commission or its staff upon request.

KRYSTAL COMPANY 10-Q