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 October 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from to
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Commission file number 0-20040
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THE KRYSTAL COMPANY
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(Exact name of registrant as specified in its charter)
TENNESSEE 62-0264140
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(State or other jurisdiction of (IRS Employer identification
incorporation or organization) Number)
One Union Square, Chattanooga, TN 37402
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(Address of principal executive offices, including zip code)
(423) 757-1550
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(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
---- ----
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 11, 2000.
THE KRYSTAL COMPANY
-------------------
October 1, 2000
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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 generally accepted accounting principles 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 adjustments necessary to
present fairly (1) the financial position of The Krystal Company and
Subsidiary as of October 1, 2000 and January 2, 2000, and (2) their change
in shareholder's equity for the nine months ending October 1, 2000 and (3)
the results of their operations and their cash flows for the nine months ended
October 1, 2000 and October 3, 1999 and (4) the results of their operations
for the three months ended October 1, 2000 and October 3, 1999 have been
included. The results of operations for the interim period ended
October 1, 2000 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 are contained in this 10-Q. These
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from the Company's historical experience
and its present expectations or projections. These risks and uncertainties
include, but are not limited to, unanticipated economic changes, interest rate
movements, changes in governmental policies, including such problems at the
Company's vendors, counterparties and customers, and the impact of competition.
The Company cautions that such factors are not exclusive. Caution should be
taken not to place undue reliance on any such forward-looking statements since
such statements speak only as of the date of the making of such statements and
are based on certain expectations and estimates of the Company which are
subject to risks and changes in circumstances that are not within the Company's
control. The information provided herein should be read in conjunction with
information provided in the Company's Form 10-K for the fiscal year ended
January 2, 2000.
PART I. FINANCIAL INFORMATION
-----------------------------
Item I. Financial Statements
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands) (Unaudited)
October 1, January 2,
2000 2000
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ASSETS
- ------
CURRENT ASSETS:
Cash and temporary investments $ 5,670 $ 5,302
Receivables, net 1,332 1,382
Inventories 1,868 2,099
Deferred income taxes 2,843 2,843
Prepayments and other 771 1,090
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Total current assets 12,484 12,716
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PROPERTY, BUILDINGS, AND EQUIPMENT, net 125,036 117,492
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LEASED PROPERTIES, net 11,868 10,518
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OTHER ASSETS:
Goodwill, net 43,286 45,432
Prepaid pension asset 8,304 8,144
Deferred financing cost, net 3,374 3,754
Other 1,684 455
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Total other assets 56,648 57,785
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TOTAL ASSETS $206,036 $198,511
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See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
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(In thousands) (Unaudited)
October 1, January 2,
2000 2000
LIABILITIES AND SHAREHOLDER'S EQUITY ----------- ----------
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 7,424 $ 7,482
Accrued liabilities 22,236 24,110
Outstanding checks in excess of
bank balance - 3,701
Current portion of long-term debt 129 53
Current portion of capital
lease obligations 1,926 1,745
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Total current liabilities 31,715 37,091
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LONG-TERM DEBT, excluding current portion 117,997 102,623
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CAPITAL LEASE OBLIGATIONS, excluding
current portion 10,855 9,467
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DEFERRED INCOME TAXES 9,550 9,828
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OTHER LONG-TERM LIABILITIES 1,292 1,152
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SHAREHOLDER'S EQUITY:
Common stock, without par value;
100 shares authorized; issued
and outstanding, at October 1, 2000,
and at January 2, 2000 35,000 35,000
Retained earnings (deficit) ( 373) 3,350
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Total shareholder's equity 34,627 38,350
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TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $206,036 $198,511
======== ========
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands)(Unaudited)
For the Three For the Nine
Months Ended Months Ended
------------------ ------------------
Oct. 1, Oct. 3, Oct. 1, Oct.3,
2000 1999 2000 1999
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REVENUES:
Restaurant sales $63,802 $64,938 $191,896 $192,933
Franchise fees 303 83 628 193
Royalty revenue 1,301 1,120 3,617 3,261
Other revenue 1,780 1,419 5,173 4,178
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67,186 67,560 201,314 200,565
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COST AND OTHER EXPENSES:
Cost of restaurant sales 53,266 53,956 163,148 158,064
Depreciation and amortization
expenses 3,684 3,553 11,017 9,991
General and administrative
expenses 6,842 5,818 19,861 19,177
Other expenses, net 1,202 897 3,476 2,523
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64,994 64,224 197,502 189,755
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OPERATING INCOME 2,192 3,336 3,812 10,810
GAIN ON SALE OF ASSET 199 - 199 -
INTEREST EXPENSE, net (3,151) (2,546) (9,085) (7,697)
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INCOME (LOSS) BEFORE (PROVISION FOR)
BENEFIT FROM INCOME TAXES ( 760) 790 (5,074) 3,113
(PROVISION FOR) BENEFIT FROM
INCOME TAXES 112 ( 517) 1,351 ( 1,852)
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NET INCOME (LOSS) $ ( 648) $ 273 $ (3,723) $ 1,261
======= ======= ======== ========
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
-----------------------------------------------
FOR THE NINE MONTHS ENDED
-------------------------
October 1, 2000
---------------
(In thousands)
(Unaudited)
Retained
Common Earnings
Stock (Deficit)
-------- --------
BALANCE, January 2, 2000 $35,000 $ 3,350
Net loss - (3,723)
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BALANCE, October 1, 2000 $35,000 $( 373)
======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(Unaudited)
For The Nine Months Ended
---------------------------
October 1, October 3,
2000 1999
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OPERATING ACTIVITIES:
Net income (loss) $(3,723) $ 1,261
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities-
Depreciation and amortization 11,017 9,991
Change in deferred taxes ( 278) ( 61)
Gain on sale of asset ( 199) -
Changes in operating assets and
liabilities:
Receivables, net 50 1,255
Inventories 231 65
Prepayments and other 319 ( 222)
Accounts payable ( 58) ( 1,393)
Outstanding checks in excess of
bank balance ( 3,701) -
Income taxes payable - 504
Accrued liabilities ( 1,874) ( 2,412)
Other, net 75 ( 356)
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Net cash provided by
operating activities 1,859 8,632
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INVESTING ACTIVITIES:
Additions to property, buildings,
and equipment (24,590) (20,032)
Proceeds from sale of property,
buildings, and equipment 8,962 3,438
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Net cash used in investing activities (15,628) (16,594)
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FINANCING ACTIVITIES:
Proceeds from borrowing 19,000 4,190
Repayments of long-term debt ( 3,550) ( 49)
Principal payments of
capital lease obligations ( 1,313) ( 395)
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Net cash provided by
financing activities 14,137 3,746
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NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS 368 (4,216)
CASH AND TEMPORARY INVESTMENTS,
beginning of period $ 5,302 $ 9,012
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CASH AND TEMPORARY INVESTMENTS,
end of period $ 5,670 $ 4,796
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 6,989 $10,757
======== ========
Income taxes $ 694 $ 2,477
======== ========
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activities --
The Krystal Company (a Tennessee corporation) ("Krystal") is engaged primarily
in the development, operation and franchising of quick-service restaurants in
the southeastern United States. Krystal's wholly-owned subsidiary, Krystal
Aviation Co. ("Aviation") operates a fixed base airport hangar operation in
Chattanooga, Tennessee. Aviation's revenues provide less than 3% of the
Company's total revenues.
Principles of Consolidation --
The accompanying consolidated financial statements include the accounts of
Krystal and Aviation (hereinafter referred to collectively as the "Company").
All significant intercompany balances and transactions have been eliminated.
Cash and temporary investments --
For purposes of the consolidated statements of cash flows, the Company considers
repurchase agreements and other temporary cash investments with a maturity of
three months or less to be temporary investments.
Inventories --
Inventories are stated at cost and consist primarily of food, paper products and
other supplies.
Property, Buildings, and Equipment --
Expenditures which materially increase useful lives are capitalized, whereas
ordinary maintenance and repairs are expensed as incurred. Depreciation of
fixed assets is computed using the straight-line method for financial reporting
purposes and accelerated methods for tax purposes over the estimated useful
lives of the related assets as follows:
Buildings and improvements 10-39 years
Equipment 3-10 years
Leaseholds Life of lease up to 20 years
Long-lived assets --
The Company periodically evaluates the carrying value of long-lived assets to be
held and used when events or changes in circumstances warrant such a review.
The carrying value of a long-lived asset is considered impaired when the
projected undiscounted future cash flow of such asset is less than its carrying
value.
Intangibles --
The consolidated balance sheet includes the allocation of purchase accounting
goodwill of $49,258,000 and deferred financing costs of $5,764,000 at October 1,
2000. Intangibles are amortized on a straight-line basis over 10 to 25 years.
Amortization expense for goodwill and deferred financing costs for the three
months ended October 1, 2000 was $494,300 and $135,000, respectively and for
the three months ended October 3, 1999 was $499,300 and $205,500, respectively.
Amortization expense for goodwill and deferred financing costs for the nine
months ended October 1, 2000 was $1,493,000 and $521,700, respectively and for
the nine months ended October 3, 1999 was $1,498,000 and $617,000, respectively.
Accumulated amortization of goodwill at October 1, 2000 and October 3, 1999 was
$5,971,000 and $3,979,000, respectively. Accumulated amortization of deferred
financing costs at October 1, 2000 and October 3, 1999 was $2,371,200 and
$1,644,000, respectively.
Franchise and License Agreements --
Franchise or license agreements are available for single and multi-unit
restaurants. The multi-unit agreement establishes the number of restaurants
the franchisee or licensee is to construct and open in the franchised area
during the term of the agreement. At October 1, 2000, there were 133 franchise
or licensed restaurants and at October 3, 1999, there were 112 franchised or
licensed restaurants.
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%
of the restaurants' gross receipts depending on the duration and type of the
franchise agreement. Unit franchise and license fees are recorded as income as
related restaurants begin operations. Royalty and service fees, which are
based on restaurant sales of franchisees and licensees, are accrued as earned.
Franchise fees received prior to the opening of the restaurant are deferred and
included in accrued liabilities on the consolidated balance sheets.
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.
2. SUMMARIZED FINANCIAL INFORMATION - SUBSIDIARY GUARANTORS
The senior notes described in Note 3 are guaranteed by each of the Company's
subsidiaries. The subsidiary guarantors are wholly owned and the guarantees
are full, unconditional, joint and several obligations of each of the
subsidiary guarantors. Summarized financial information for the subsidiary
guarantors is set forth below. Separate financial statements for the
subsidiary guarantors of the Company are not presented because the Company has
determined that such financial statements would not be material to investors.
The subsidiary guarantors comprise all of the direct and indirect subsidiaries
of the Company, other than the non-guarantor subsidiaries which individually,
and in the aggregate, are inconsequential. There are no restrictions on the
ability of the subsidiary guarantors to declare dividends, or make loans or
advances to the Company.
The following table presents summarized financial information for subsidiary
guarantors in connection with all of the Company's 10.25% Senior Subordinated
Notes:
October 1, January 2,
2000 2000
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(in thousands)
Balance Sheet Data:
Current assets $ 807 $ 470
Noncurrent assets $4,984 $3,475
Current liabilities $ 654 $ 985
Non current liabilities $1,947 $ 138
For the Nine Months Ended
-------------------------
October 1, October 3,
2000 1999
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(in thousands)
Income Statement Data:
Net sales $5,173 $4,178
Gross profit $1,387 $1,359
Income before provision for federal
and state income taxes $ 829 $1,036
Net income $ 513 $ 642
3. INDEBTEDNESS
Revolving Credit Agreement:
The Company has in place a credit facility with a bank for $25 million
(the "Credit Facility") which matures in May, 2003. Borrowings under the
Credit Facility bear interest rates, at the option of the Company, equal to
either: (a) the greater of the prime rate, or the federal funds rate plus
0.5%, plus a margin of 0.5%; or (b) the rate offered in the Eurodollar market
for amounts and periods comparable to the relevant loan, plus a margin (which
changes from 0.75% to 3.5%) that is determined by certain financial covenants.
The weighted average interest rate on borrowings under the Credit Facility at
October 1, 2000 was 9.63%. Availability under the Credit Facility as of
October 1, 2000 was $6.6 million.
The Credit Facility contains restrictive covenants including, but not limited
to: (a) the Company's required maintenance of minimum levels of tangible net
worth; (b) limitations regarding additional indebtedness; (c) the Company's
required maintenance of a minimum amount of fixed charges coverage; and
(d) limitations regarding liens on assets. Additionally, the Credit Facility
contains a provision that, in the event of a defined change of control, the
Credit Facility will be terminated. As of October 1, 2000, and for the quarter
then ended, the Company was in compliance with, or had obtained waivers for,
all loan covenants.
Senior Notes:
In September, 1997, the Company issued $100 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.
4. CONTINGENCIES
On September 21, 1999, the Company was named as a defendant in a lawsuit filed
in the Northern District of Alabama (Michael Jones vs. The Krystal Company)
alleging that the plaintiff was denied access to the restrooms in one of the
Company's restaurants in violation of the Americans with Disabilities Act.
The lawsuit seeks class action status on behalf of all wheelchair bound patrons
of the Company's restaurants who have been denied access to restrooms. The
Company and plaintiff's counsel have tentatively agreed to a settlement of this
lawsuit. The Company's legal counsel and plaintiff's counsel are in the
process of negotiating the proposed settlement agreement, which must also be
submitted to the federal district court for approval. Under the terms of the
proposed settlement the Company will commit to renovate the restrooms in its
restaurants that are not handicap accessible in exchange for the dismissal of
the lawsuit.
The Company is party to various other 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 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
The following table reflects certain key operating statistics which impact the
Company's financial results:
KEY OPERATING STATISTICS
(Dollars in thousands except average check)
For the Three For the Nine
Months Ended Months Ended
------------------ --------------------
Oct. 1, Oct. 3, Oct. 1, Oct. 3,
2000 1999 2000 1999
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RESTAURANT SALES
Company owned $63,802 $64,938 $191,896 $192,933
Franchised 26,763 22,832 74,245 65,595
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SYSTEMWIDE RESTAURANT SALES $90,565 $87,770 $266,141 $258,528
Percent change 3.2% 3.0%
COMPANY RESTAURANT STATISTICS:
Number of restaurants 255 248 255 248
Restaurant sales $63,802 $64,938 $191,896 $192,933
Percent change ( 1.8%) ( 0.5%)
Percent change in
same restaurant sales ( 5.1%) (0.5%) ( 4.9%) 6.0%
Transactions per day 597 670 610 681
Percent change (10.9%) (10.4%)
Average check $ 4.58 $ 4.34 $ 4.52 $ 4.27
Percent change 5.5% 5.9%
Selected components are --
Cost of restaurant sales $53,266 $53,956 $163,148 $158,064
As a percent of restaurant sales 83.5% 83.1% 85.0% 81.9%
Food and paper cost $20,521 $20,473 $ 62,101 $ 59,818
As a percent of restaurant sales 32.2% 31.5% 32.4% 31.0%
Direct labor $15,078 $15,690 $ 46,533 $ 45,266
As a percent of restaurant sales 23.6% 24.2% 24.3% 23.5%
Other labor costs $ 4,835 $ 4,951 $ 15,116 $ 14,885
As a percent of restaurant sales 7.6% 7.6% 7.9% 7.7%
FRANCHISE SYSTEM STATISTICS:
Number of restaurants 133 112 133 112
Restaurant sales $26,763 $22,832 $ 74,245 $ 65,595
Percent change 17.2% 13.2%
Percent change in same
restaurant sales (5.0%) 4.2% (2.4%) 9.2%
Transactions per day 470 493 468 488
Percent change (4.7%) (4.1%)
Average check $ 4.77 $ 4.50 $ 4.66 $ 4.42
Percent change 6.0% 5.4%
Comparison of the Three Months Ended October 1, 2000
----------------------------------------------------
to the Three Months Ended October 3, 1999
-----------------------------------------
CASH OPERATING PROFIT
---------------------
Cash operating profit (net income before interest, taxes, depreciation and
amortization, and other non-operating gains, losses or expenses) is one of the
key standards used by the Company to measure operating performance. Cash
operating profit is used to supplement operating income as an indicator of
operating performance and cash flows from operating activities as a measure of
liquidity, and not as an alternative to measures defined and required by
generally accepted accounting principles. This measure may not be comparable
to similarly titled measures used by other companies.
Cash operating profit for the three months ended October 1, 2000 decreased
$1.0 million to $5.9 million (8.7% of revenues) compared to $6.9 million
(10.2% of revenues) for the three months ended October 3, 1999. The decrease
in cash operating profit was primarily attributable to a decrease in same
restaurant sales, an increase in the wholesale cost of food and paper and an
increase in general and administrative expenses.
RESULTS OF OPERATIONS
---------------------
Total Krystal systemwide restaurant sales, which included restaurant sales of
$63.8 million for company-owned and $26.8 million for franchised units, for the
three months ended October 1, 2000 increased 3.2% to $90.6 million compared to
$87.8 million for the same period last year.
Total Company revenues decreased 0.6% to $67.2 million in the three months
ended October 1, 2000 compared to $67.6 million in the same period last year.
The $0.4 million decrease was comprised of a $1.1 million decrease in
restaurant sales, $401,000 increase in royalty and franchise revenue and a
$361,000 increase in other revenue from the Company's aviation subsidiary.
The decrease in restaurant sales was due to a decrease in same store sales.
The Company operated 255 restaurants at October 1, 2000 compared to 248
restaurants at October 3, 1999.
Company-owned same restaurant sales decreased 5.1% compared to the same period
in 1999. The decrease was primarily due to a decrease in transaction counts
offset in part by an increase in average check amounts. Transaction counts per
restaurant day, which represent a count of orders taken rather than actual
customers served, decreased 11.0% to 597 in the three months ended
October 1, 2000 compared to 671 in the same period in 1999. The decrease in
transaction counts was primarily attributable to heavy discounting by
competitors, which adversely affected customer traffic in the Company's
restaurants.
The average customer check for Company-owned restaurants for the three months
ended October 1, 2000 was $4.58 compared to $4.34 for the three months ended
October 3, 1999, an increase of 5.5%. The increase in average customer
check was due primarily to selected product price increases of approximately
5.0% implemented in the first and second quarters of 2000.
The Company's franchisees opened eleven franchised restaurants in the three
months ended October 1, 2000 compared to one in the three months ended
October 3, 1999. The franchise system operated 133 restaurants at
October 1, 2000 compared to 112 at October 3, 1999. Franchise fee income
was $303,000 in the three months ended October 1, 2000 compare to $83,000 in
the three months ended October 3, 1999. Royalty revenue increased 16.2% to
$1.3 million in the three months ended October 1, 2000 from $1.1 million in
the three months ended October 3, 1999. This increase resulted primarily
from a 17.2% increase in franchise restaurant sales.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, was $1.8 million for the three months ended October 1, 2000
compared to $1.4 million for the three months ended October 3, 1999, a 25.4%
increase. This increase in revenue resulted primarily from an increase in
retail jet fuel prices during the three months ended October 1, 2000 compared
to the three months ended October 3, 1999.
Cost of restaurant sales was $53.3 million for the three months ended
October 1, 2000 compared to $54.0 million for the three months ended
October 3, 1999. Food and paper costs as a percent of restaurant sales
increased to 32.2% in the three months ended October 1, 2000 from 31.5% in the
three months ended October 3, 1999. The increase in food and paper costs as a
percent of restaurant sales resulted primarily from an increase in sales of
the Company's new Chicken Wing offering in addition to a commodity price
increase for pork. The new Chicken Wing offering has a lower gross margin but,
because of its higher sales price, contributes more profit than many of the
Company's other offerings.
Depreciation and amortization expenses increased $131,000, or 3.7%, to $3.7
million in the three months ended October 1, 2000 versus the same period last
year. The increase resulted primarily from capital expenditures related to
refurbishing restaurant buildings, upgrading restaurant equipment and opening
new restaurants.
General and administrative expenses increased $1.0 million, or 17.6%, to $6.8
million in the three months ended October 1, 2000 versus same period last year.
The increase in general and administrative expenses resulted primarily from
expenses related to the newly created franchise operation's department and
franchise advertising which supports the Company's franchise system growth.
Other expenses increased $305,000, or 34.0%, to $1.2 million in the three
months ended October 1, 2000 versus the same period last year. This increase
resulted primarily from an increase in the wholesale cost of jet fuel purchased
by the Company's aviation subsidiary in the three months ended October 1, 2000
compared to the same period in 1999.
The Company reported a gain on sale of assets of $199,000 for the three months
ended October 1, 2000 compared to none for the three months ended October 3,
1999. The gain resulted from the sale of four restaurants to a franchisee.
Interest expense, net of interest income, increased $605,000 to $3.2 million in
the three months ended October 1, 2000 from $2.5 million in the three months
ended October 3, 1999. The increase resulted from an increase in interest
expense related to capitalized leases and higher costs related to corporate debt
maintenance resulting from a higher average interest rate during the period.
The Company's provision for income taxes decreased $629,000, to a $112,000 tax
benefit from $517,000 in the three months ended October 3, 1999. The effective
tax rate exceeded the statutory income tax rate primarily because of the
non-deductible portion of amortization expense associated with acquisition-
related goodwill.
Comparison of the Nine Months Ended October 1, 2000
---------------------------------------------------
to the Nine Months Ended October 3, 1999
----------------------------------------
CASH OPERATING PROFIT
---------------------
Cash operating profit (net income before interest, taxes, depreciation and
amortization, and other non-operating gains, losses or expenses) is one of the
key standards used by the Company to measure operating performance. Cash
operating profit is used to supplement operating income as an indicator of
operating performance and cash flows from operating activities as a measure of
liquidity, and not as an alternative to measures defined and required by
generally accepted accounting principles. This measure may not be comparable
to similarly titled measures used by other companies.
Cash operating profit for the nine months ended October 1, 2000 decreased $6.0
million to $14.8 million (7.4% of revenues) compared to $20.8 million (10.4% of
revenues) for the nine months ended October 3, 1999. The 28.7% decrease in
cash operating profit was primarily attributable to a decrease in restaurant
sales and to a temporary increase in labor in the first quarter and continuing
higher food and paper costs.
RESULTS OF OPERATIONS
---------------------
Total Krystal systemwide restaurant sales, which included restaurant sales of
$191.9 million for company-owned and $74.2 million for franchised units, for
the nine months ended October 1, 2000 increased 3.0% to $266.1 million compared
to $258.5 million for the same period last year.
Total Company revenues increased 0.4% to $201.3 million in the nine months
ended October 1, 2000 compared to $200.6 million in the nine months ended
October 3, 1999. The $0.7 million increase was comprised of a $1.0 million
decrease in restaurant sales, a $791,000 increase in royalty and franchise
revenue and a $995,000 increase in other revenue from the Company's aviation
subsidiary. The Company had 255 restaurants open at October 1, 2000 compared
to 248 restaurants open at October 3, 1999.
Company-owned same restaurant sales for the nine months ended October 1, 2000
were $177.5 million compared to $186.6 million for the nine months ended
October 3, 1999, a decrease of 4.9%. The decrease in same restaurant sales
resulted primarily from a decrease in transaction counts offset in part by an
increase in the amount of the average customer check. Transaction counts per
restaurant day, which represent a count of orders taken rather than actual
customers served, decreased 10.4% to 610 in the nine months ended October 1,
2000 compared to 681 in the same period of 1999. The decrease in transaction
counts resulted in part from a reduction in customer traffic and in part from
increased sales of the Company's Sackful offerings (sacks of eight and twelve
Krystal hamburgers) which tend to feed multiple customers through a single
transaction. The customer traffic decrease was primarily a reflection of the
high comparable traffic for the same period in 1999 and heavy discounting by
competitors in the second and third quarters. The high traffic in 1999 was due
to introductions of the Company's Krystal Chik and Sackful menu items which
were accompanied by heavy promotional efforts. During the product introduction
phase for the Krystal Chik and Sackful offerings, same restaurant sales
increased significantly, before stabilizing at slightly lower levels in
subsequent fiscal periods.
The average customer check for Company-owned restaurants for the nine months
ended October 1, 2000 was $4.52 compared to $4.27 for the nine months ended
October 3, 1999, an increase of 5.9%. The increase in average customer
check was due primarily to increased food volume per transaction resulting from
the Sackful offering and to maintaining product price increases of
approximately 4.4% implemented in the first three quarters of 2000 versus the
same period of 1999. During the nine months ended October 1, 2000, sales of
Sackfuls accounted for $26.0 million or 13.5% of restaurant sales compared to
$24.1 million, or 12.5% of restaurant sales, for the nine months ended
October 3, 1999.
The Company's franchisees opened 21 franchised restaurants in the nine months
ended October 1, 2000 compared to four in the nine months ended October
3, 1999. The franchise system operated 133 restaurants at October 1, 2000
compared to 112 at October 3, 1999. Franchise fee income was $628,000 in the
nine months ended October 1, 2000 compared to $193,000 in the nine months ended
October 3, 1999. Royalty revenue increased 10.9% to $3.6 million in the nine
months ended October 1, 2000 from $3.3 million in the nine months ended October
3, 1999. This increase was primarily due to a 13.2% increase in franchise
restaurant sales and was partially offset by a decrease in royalties from
grocery channel sales of frozen Krystals of $20,600. Royalties from the grocery
channel sales of frozen Krystals were $153,300 in the nine months ended October
1, 2000 compared to $173,900 in the same period of 1999.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, was $5.2 million for the nine months ended October 1, 2000
compared to $4.2 million for the nine months ended October 3, 1999,
a 23.8% increase. This increase in revenue resulted primarily from an
increase in retail jet fuel prices during the nine months ended
October 1, 2000 compared to the nine months ended October 3, 1999.
Cost of restaurant sales was $163.1 million for the nine months ended
October 1, 2000 compared to $158.1 million for the nine months ended
October 3, 1999. The increase in cost of restaurant sales resulted
primarily from an increase in the cost of food sold and increased labor
costs. Food and paper costs as a percent of restaurant sales increased to
32.4% in the nine months ended October 1, 2000 from 31.0% in the nine months
ended October 3, 1999. The increase in food and paper costs as a percent of
restaurant sales resulted in part from increases in the price of beef, pork and
to a lesser extent, increases in the prices for bread products. Direct labor
costs as a percent of restaurant sales increased to 24.3% in the nine months
ended October 1, 2000 from 23.5% in the nine months ended October 3, 1999. The
increase in direct labor costs as a percentage of restaurant sales resulted
from an increase in the average pay rate of the Company's hourly restaurant
employees in the first quarter and reduced labor efficiency caused by lower
same store sales. Temporary labor inefficiencies were compounded by
incremental labor incurred during the first quarter in conjunction with field
level training related to the Company's new Restaurant Information System.
Other labor costs as a percent of restaurant sales increased to 7.9% in the
nine months ended October 1, 2000 from 7.7% in the nine months ended
October 3, 1999. The increase in other labor costs as a percent of restaurant
sales resulted from higher labor rates.
Depreciation and amortization expenses increased $1.0 million, or 10.3%, to
$11.0 million in the nine months ended October 1, 2000 compared to $10.0
million in the nine months ended October 3, 1999. The increase resulted
primarily from capital expenditures related to refurbishing restaurant
buildings, upgrading restaurant equipment and opening new restaurants.
General and administrative expenses increased $684,000, or 3.6%, to $19.9
million in the nine months ended October 1, 2000 compared to $19.2 million in
the nine months ended October 3, 1999. The increase in general and
administrative expenses resulted primarily from management's increased emphasis
in the newly created franchise operations department and franchise advertising
which supports the Company's franchise system growth.
Other expenses increased $953,000, or 37.8%, to $3.5 million in the nine
months ended October 1, 2000 compared to $2.5 million in the nine months ended
October 3, 1999. These expenses are costs incurred in operating the Aviation
subsidiary. This increase resulted primarily from an increase in jet fuel
costs in the nine months ended October 1, 2000 compared to the same period in
1999.
The Company reported a gain on sale of assets of $199,000 for the nine months
ended October 1, 2000 compared to none for the nine months ended October 3,
1999. The gain resulted from the sale of four restaurants to a franchisee.
Interest expense, net of interest income, increased $1.4 million to $9.1
million in the nine months ended October 1, 2000 from $7.7 million in the nine
months ended October 3, 1999. The increase resulted from an increase in
interest expense related to capitalized leases and higher costs related to
corporate debt maintenance.
The Company's provision for income taxes decreased $3.2 million, to a tax
benefit of $1.3 million in the nine months ended October 1, 2000 compared
to a tax provision of $1.9 million for the nine months ended October 3, 1999.
The effective income tax rate was 26.6% for the nine months ended October 1,
2000 as compared to 59.5% for the nine months ended October 3, 1999. The
effective tax rate in the prior year exceeded the statutory income tax rate
primarily because of the non-deductible portion of amortization expense
associated with acquisition-related goodwill.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company does not maintain significant inventory or accounts receivables
since substantially all of its restaurants' sales are for cash. However, the
Company closely monitors receivables from franchisees. 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 $19.2 million at October 1, 2000, compared to a
working capital deficit of $24.4 million at January 2, 2000.
Capital expenditures totaled approximately $24.6 million in the nine months
ended October 1, 2000 as compared to $20.0 million in the nine months ended
October 3, 1999. Included in the capital expenditures for the nine months
ended October 1, 2000 is approximately $4.3 million related to properties the
Company expects to sell through sales and leaseback transactions within the
next six months. The Company opened twelve new restaurants during the nine
months ended October 1, 2000 and opened eight during the nine months ended
October 3, 1999. Management estimates that capital expenditures will be
approximately $2.2 million during the remainder of 2000. Capital
expenditures for the remainder of the current year are expected to include the
the acquisition of land for restaurants to open in 2001, the refurbishment of
certain restaurants, ongoing capital improvements, the conversion of restaurant
computer systems and the construction of a new, pre-leased hangar at the
Aviation subsidiary.
In December, 1998, the Company obtained a sales and leaseback commitment with
a firm for up to $6.0 million of properties which were to be developed and
operated as Company-owned Krystal restaurants. In September, 1999, this
commitment was increased to $9.0 million. As of October 1, 2000, seven
restaurants have been developed using $6.2 million of this commitment.
The remaining balance of this commitment has expired and will not be used. In
August 2000, the Company obtained a new $14 million sale and leaseback
commitment from the same firm, of which $2.8 million was used to complete sale
and leaseback transactions in the quarter ended October 1, 2000. The new
commitment expires in August 2001. The primary term of leases under this
arrangement is 18 years, with two successive five year renewal options.
At October 1, 2000, the Company had available cash of approximately $5.7
million, receivables of $1.3 million, and $6.6 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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On September 21, 1999, the Company was named as a defendant in a lawsuit filed
in the Northern District of Alabama (Michael Jones vs. The Krystal Company)
alleging that the plaintiff was denied access to the restrooms in one of the
Company's restaurants in violation of the Americans with Disabilities Act.
The lawsuit seeks class action status on behalf of all wheelchair bound patrons
of the Company's restaurants who have been denied access to restrooms. The
Company and plaintiff's counsel have tentatively agreed to a settlement of this
lawsuit. The Company's legal counsel and plaintiff's counsel are in the
process of negotiating the proposed settlement agreement, which must also be
submitted to the federal district court for approval. Under the terms of the
proposed settlement the Company will commit to renovate the restrooms in its
restaurants that are not handicap accessible in exchange for the dismissal of
the lawsuit.
The Company is party to various other 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-
Exhibit-27 Financial Data Schedule is filed with this 10-Q.
(b) Reports on Form 8-K-
No Form 8-K was filed by the Registrant during the third quarter
of 2000.
THE KRYSTAL COMPANY AND SUBSIDIARY
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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: 11/7/00 /s/Larry D. Bentley
- --------------- ------------------------
Larry D. Bentley
(Vice President, Chief Financial Officer
and Principal Accounting Officer)