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 April 1, 2001
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 0-20040
---------------------------------
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
---- ----
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
May 10, 2001.
THE KRYSTAL COMPANY
-------------------
April 1, 2001
-------------
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 April 1, 2001 and December 31, 2000, and (2) their change in shareholder's
equity for the three months ending April 1, 2001 and (3) the results of their
operations and their cash flows for the three months ended April 1, 2001 and
April 2, 2000 have been included. The results of operations for the
interim period ended April 1, 2001 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. 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 Company's ability to obtain
funding sufficient to meet operation 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 31, 2000.
PART I. FINANCIAL INFORMATION
-----------------------------
Item I. Financial Statements
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
April 1, December 31,
2001 2000
(Unaudited)
--------- ----------
ASSETS
- ------
CURRENT ASSETS:
Cash and temporary investments $ 4,777 $ 4,979
Receivables, net 1,869 1,952
Inventories 2,073 1,992
Deferred income taxes 2,785 2,785
Prepayments and other 842 802
-------- --------
Total current assets 12,346 12,510
-------- --------
PROPERTY, BUILDINGS, AND EQUIPMENT, net 121,325 123,311
-------- --------
LEASED PROPERTIES, net 10,779 11,323
-------- --------
OTHER ASSETS:
Goodwill, net 42,302 42,794
Prepaid pension asset 8,357 8,358
Deferred financing costs, net 3,141 3,278
Other 1,174 1,627
-------- --------
Total other assets 54,974 56,057
-------- --------
TOTAL ASSETS $199,424 $203,201
======== ========
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
(In thousands)
April 1, December 31,
2001 2000
(Unaudited)
----------- ----------
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 7,477 $ 7,445
Accrued liabilities 21,240 21,918
Outstanding checks in excess
of bank balance 1,079 2,745
Current portion of long-term debt 143 120
Current portion of capital
lease obligations 2,037 1,962
-------- --------
Total current liabilities 31,976 34,190
-------- --------
LONG-TERM DEBT, excluding current portion 114,931 113,992
-------- --------
CAPITAL LEASE OBLIGATIONS, excluding
current portion 9,781 10,341
-------- --------
DEFERRED INCOME TAXES 10,237 10,279
-------- --------
OTHER LONG-TERM LIABILITIES 1,385 1,360
-------- --------
SHAREHOLDER'S EQUITY:
Common stock, without par value;
100 shares authorized; issued
and outstanding, at April 1, 2001,
and at December 31, 2000 35,000 35,000
Accumulated deficit ( 3,886) ( 1,961)
-------- --------
Total shareholder's equity 31,114 33,039
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $199,424 $203,201
======== ========
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands) (Unaudited)
For the three Months ended
--------------------------
April 1, April 2,
2001 2000
------- --------
REVENUES:
Restaurant sales $ 59,298 $ 61,655
Franchise fees 358 65
Royalties 1,351 1,066
Other revenue 1,717 1,579
------- -------
Total revenues 62,724 64,365
------- -------
COST AND OTHER EXPENSES:
Cost of restaurant sales 50,636 54,393
Depreciation and amortization
expenses 3,643 3,451
General and administrative
expenses 6,868 6,609
Other expenses, net 1,099 1,083
------- -------
Total operating expenses 62,246 65,536
------- -------
OPERATING INCOME (LOSS) 478 ( 1,171)
GAIN ON SALE OF ASSETS 30 --
INTEREST EXPENSE, net ( 3,305) ( 3,137)
------- -------
LOSS BEFORE BENEFIT
FROM INCOME TAXES ( 2,797) ( 4,308)
BENEFIT FROM INCOME TAXES 872 1,414
------- -------
NET LOSS $( 1,925) $( 2,894)
======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
-----------------------------------------------
FOR THE THREE MONTHS ENDED
-------------------------
APRIL 1, 2001
-------------
(In thousands)
(Unaudited)
Common Retained
Stock Earnings
-------- --------
BALANCE, December 31, 2000 $35,000 $( 1,961)
Net loss -- ( 1,925)
------- -------
BALANCE, April 1, 2001 $35,000 $( 3,886)
======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(Unaudited)
For The Three Months Ended
----------------------------
April 1, April 2,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,925) $ (2,894)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities-
Depreciation and amortization 3,643 3,451
Change in deferred taxes ( 42) 476
Gain on sale of assets ( 30) --
Changes in operating assets and liabilities:
Receivables, net 83 219
Inventories ( 81) 246
Prepayments and other ( 40) 356
Accounts payable 32 ( 4,164)
Accrued liabilities ( 678) ( 1,927)
Other, net 772 ( 34)
-------- --------
Net cash provided by (used in)
operating activities 1,734 ( 4,271)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings,
and equipment ( 1,286) ( 9,893)
Proceeds from sale of property,
buildings, and equipment 539 474
-------- --------
Net cash used in investing activities ( 747) ( 9,419)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit
facility 1,000 14,539
Repayments of long-term debt ( 38) ( 21)
Outstanding checks in excess of
bank balance ( 1,666) ( 11)
Principal payments of
capital lease obligations ( 485) ( 424)
-------- --------
Net cash provided by (used in)
financing activities ( 1,189) 14,083
-------- --------
NET (DECREASE) INCREASE IN CASH AND
TEMPORARY INVESTMENTS ( 202) 393
CASH AND TEMPORARY INVESTMENTS,
beginning of period 4,979 5,302
-------- --------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 4,777 $ 5,695
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 635 $ 352
======= =======
Income taxes $ 21 $ 434
======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
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 $5,785,000 at April 1,
2001. Goodwill is amortized over 25 years. Deferred financing costs are
amortized over the life of the debt agreement. Amortization expense for
goodwill and deferred financing costs for the three months ended
April 1, 2001 was $491,900 and $135,900, respectively and for the three months
ended April 2, 2000 was $499,300 and $205,500, respectively. Accumulated
amortization of goodwill at April 1, 2001 and April 2, 2000 was $6,955,200
and $4,978,000, respectively. Accumulated amortization of deferred
financing costs at April 1, 2001 and April 2, 2000 was $2,642,400 and
$2,055,000, 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 April 1, 2001, there were 142 franchised
or licensed restaurants and at April 2, 2000, there were 120 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' sales 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.
Reclassifications--
Certain reclassifications have been made to prior year financial statements
to conform with the 2001 presentation.
2. SUMMARIZED FINANCIAL INFORMATION - SUBSIDIARY GUARANTORS
The Company's subsidiaries have fully and unconditionally guaranteed the
notes (See Note 4) of the Company. The guarantees do not restrict the ability
of the subsidiary guarantors to declare dividends, or make loans or advances
to the Company.
Set forth below are condensed consolidating financials for the Company and the
Subsidiary Guarantors as of April 1, 2001 and December 31, 2000 and the three
months ended April 1, 2001 and April 2, 2000. The equity method has been used
by the Company with respect to investments in subsidiaries. Separate financial
statements for the Subsidiary Guarantors are not presented based on
management's determination that they do not provide additional information
that is material to investors.
CONDENSED CONSOLIDATING BALANCE SHEET
At April 1, 2001 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
----------- ---------- ----------- -----------
Current Assets:
Cash and temporary investments $ 4,777 $ -- $ -- $ 4,777
Receivables, net (8,181) 350 9,700 1,869
Inventories 2,013 60 -- 2,073
Deferred income taxes 2,752 33 -- 2,785
Prepayments and other 795 47 -- 842
-------- ------- ------- --------
Total current assets 2,156 490 9,700 12,346
-------- ------- ------- --------
Property, buildings, and equipment, net 116,586 4,739 -- 121,325
-------- ------- ------- --------
Leased Properties, net 10,779 -- -- 10,779
Investment in Subsidiary 1 1 (2) --
Other Assets:
Goodwill, net 42,302 -- -- 42,302
Prepaid pension asset 8,357 -- -- 8,357
Deferred financing costs, net 3,141 -- -- 3,141
Other 1,156 18 1,174
-------- ------- ------- --------
Total other assets 54,956 18 -- 54,974
-------- ------- ------- --------
Total Assets $184,478 $ 5,248 $ 9,698 $199,424
======== ======= ======= ========
Current Liabilities:
Accounts payable $ (2,503) $ 280 $ 9,700 $ 7,477
Accrued liabilities 20,853 387 21,240
Outstanding checks in excess
of bank balance 994 85 -- 1,079
Current portion of long-term debt -- 143 143
Current portion of capital lease
obligations 2,037 -- -- 2,037
-------- ------- ------- --------
Total current liabilities 21,381 752 9,843 31,976
-------- ------- ------- --------
Long Term Debt, excluding current
portion 113,095 1,979 (143) 114,931
-------- ------- ------- --------
Capital Lease Obligations, excluding
current portion 9,781 -- -- 9,781
-------- ------- ------- --------
Deferred Income Taxes 10,766 (529) 10,237
-------- ------- ------- --------
Other Long-Term Liabilities 1,385 -- -- 1,385
-------- ------- ------- --------
Shareholder's Equity:
Common Stock 35,000 2 (2) 35,000
Retained Earnings (6,930) 3,044 -- (3,886)
-------- ------- ------- --------
Total shareholder's equity 28,070 3,046 (2) 31,114
-------- ------- ------- --------
Total Liabilities and Shareholder's
Equity $184,478 $ 5,248 $ 9,698 $199,424
======== ======= ======= ========
CONDENSED CONSOLIDATING BALANCE SHEET
At December 31, 2000
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
---------- ---------- ----------- -----------
Current Assets:
Cash and temporary investments $ 4,554 $ 425 $ -- $ 4,979
Receivables, net (6,411) 515 7,848 1,952
Inventories 1,942 50 -- 1,992
Deferred income taxes 2,752 33 -- 2,785
Prepayments and other 735 67 - 802
-------- ------- ------- --------
Total current assets 3,572 1,090 7,848 12,510
-------- ------- ------- --------
Property, buildings, and equipment, net 118,536 4,775 -- 123,311
-------- ------- ------- --------
Leased Properties, net 11,323 -- -- 11,323
-------- ------- ------- --------
Investment in Subsidiary 1 1 (2) -
-------- ------- ------- --------
Other Assets:
Goodwill, net 42,794 -- -- 42,794
Prepaid pension asset 8,358 -- -- 8,358
Deferred financing costs, net 3,278 -- -- 3,278
Other 1,608 19 -- 1,627
-------- ------- ------- --------
Total other assets 56,038 19 -- 56,057
-------- ------- ------- --------
Total assets $189,470 $ 5,885 $ 7,846 $203,201
======== ======= ======= ========
Current Liabilities:
Accounts payable $( 1,469) $ 1,066 $7,848 $ 7,445
Accrued liabilities 21,458 460 -- 21,918
Outstanding checks in excess
of bank balance 2,745 -- -- 2,745
Current portion of long-term debt -- 120 120
Current portion of capital lease
obligations 1,962 -- -- 1,962
-------- ------- ------- --------
Total current liabilities 24,696 1,526 7,968 34,190
-------- ------- ------- --------
Long Term Debt, excluding current
portion 112,100 2,012 ( 120) 113,992
-------- ------- ------- --------
Capital Lease Obligations, excluding
current portion 10,341 -- -- 10,341
-------- ------- ------- --------
Deferred Income Taxes 10,808 (529) - 10,279
-------- ------- ------- --------
Other Long-Term Liabilities 1,360 -- -- 1,360
-------- ------- ------- --------
Shareholder's Equity:
Common Stock 35,000 2 (2) 35,000
Retained Earnings ( 4,835) 2,874 -- ( 1,961)
-------- ------- ------- --------
Total shareholder's equity 30,165 2,876 (2) 33,039
-------- ------- ------- --------
Total Liabilities and Shareholder's
Equity $189,470 $ 5,885 $ 7,846 $203,201
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended April 1, 2001
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
REVENUES:
Restaurant sales $ 59,298 $ -- $ -- $ 59,298
Franchise fees 358 -- 358
Royalties 1,351 -- 1,351
Other revenue - 1,717 -- 1,717
-------- ------- ------- --------
Total revenues 61,007 1,717 -- 62,724
-------- ------- ------- --------
COST AND OTHER EXPENSES:
Cost of restaurant sales 50,636 -- -- 50,636
Depreciation and amortization
expense 3,514 129 -- 3,643
General and administrative
expenses 6,805 63 -- 6,868
Other expenses, net (125) 1,224 -- 1,099
-------- ------- ------- --------
Total operating expenses 60,830 1,416 -- 62,246
-------- ------- ------- --------
OPERATING INCOME 177 301 -- 478
GAIN ON SALE OF ASSETS 30 -- -- 30
INTEREST EXPENSE, net ( 3,270) (35) -- ( 3,305)
-------- ------- ------- --------
INCOME (LOSS) BEFORE PROVISION
FOR (BENEFIT FROM) INCOME TAXES ( 3,063) 266 -- ( 2,797)
PROVISION FOR (BENEFIT FROM)
INCOME TAXES ( 968) 96 -- ( 872)
-------- ------- ------- --------
NET INCOME (LOSS) $( 2,095) $ 170 $ -- $( 1,925)
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended April 2, 2000
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
REVENUES:
Restaurant sales $ 61,655 $ -- $ -- $ 61,655
Franchise fees 65 -- -- 65
Royalties 1,066 -- -- 1,066
Other revenue - 1,579 -- 1,579
-------- ------- ------- --------
Total revenues 62,786 1,579 -- 64,365
-------- ------- ------- --------
COST AND OTHER EXPENSES:
Cost of restaurant sales 54,393 -- -- 54,393
Depreciation and amortization
expense 3,353 98 -- 3,451
General and administrative
expenses 6,548 61 -- 6,609
Other expenses, net (100) 1,183 -- 1,083
-------- ------- ------- --------
Total operating expenses 64,194 1,342 -- 65,536
-------- ------- ------- --------
OPERATING INCOME (LOSS) ( 1,408) 237 -- ( 1,171)
INTEREST INCOME (EXPENSE), net ( 3,138) 1 -- ( 3,137)
-------- ------- ------- --------
INCOME (LOSS) BEFORE PROVISION
FOR (BENEFIT FROM) INCOME TAXES ( 4,546) 238 -- ( 4,308)
PROVISION FOR (BENEFIT FROM)
INCOME TAXES ( 1,505) 91 -- ( 1,414)
-------- ------- ------- --------
NET INCOME (LOSS) $( 3,041) $ 147 $ -- $( 2,894)
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended April 1, 2001
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,095) $ 170 $ -- $ (1,925)
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities -
Depreciation and amortization 3,514 129 -- 3,643
Change in deferred income taxes ( 42) -- -- ( 42)
Gain on sale of asset ( 30) -- -- ( 30)
Changes in operating assets and
liabilities:
Receivables, net ( 82) 165 -- 83
Inventories ( 71) ( 10) -- ( 81)
Prepayments and other ( 60) 20 -- ( 40)
Accounts payable 818 ( 786) -- 32
Accrued liabilities ( 605) ( 73) -- ( 678)
Other, net 771 1 -- 772
-------- ------- ------- --------
Net cash provided by (used in)
operating activities 2,118 ( 384) -- 1,734
-------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment ( 1,193) ( 93) -- (1,286)
Proceeds from the sale of property,
buildings and equipment 539 -- -- 539
-------- ------- ------- --------
Net cash used in investing
activities ( 654) ( 93) -- ( 747)
-------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under
revolving credit facility 1,000 -- -- 1,000
Repayments of long-term debt ( 5) ( 33) -- ( 38)
Outstanding checks in excess of
bank balance ( 1,751) 85 -- (1,666)
Principal payments of capital
lease obligations ( 485) -- -- ( 485)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities ( 1,241) 52 -- (1,189)
-------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS 223 ( 425) -- ( 202)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 4,554 425 -- 4,979
-------- -------- ------- --------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 4,777 $ -- $ -- $ 4,777
======== ======== ======= ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended April 2, 2000
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- -------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $( 3,041) $ 147 $ -- $( 2,894)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities -
Depreciation and amortization 3,353 98 -- 3,451
Change in deferred income taxes 476 -- -- 476
Changes in operating assets and
liabilities:
Receivables, net 259 ( 40) -- 219
Inventories 244 2 -- 246
Prepayments and other 340 16 -- 356
Accounts payable ( 5,037) 873 -- ( 4,164)
Accrued liabilities ( 1,475) ( 452) -- ( 1,927)
Other, net ( 35) 1 -- ( 34)
-------- -------- ------- -------
Net cash provided by (used in)
operating activities ( 4,916) 645 -- ( 4,271)
-------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment ( 9,372) ( 521) -- ( 9,893)
Proceeds from the sale property,
buildings and equipment 474 -- -- 474
-------- ------- ------- -------
Net cash used in investing
activities ( 8,898) ( 521) -- ( 9,419)
-------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under
revolving credit facility 14,539 -- -- 14,539
Repayments of long-term debt ( 5) ( 16) -- ( 21)
Outstanding checks in excess of
bank balance 122 ( 133) -- ( 11)
Principal payments of capital
lease obligations ( 424) -- -- ( 424)
-------- ------- ------- -------
Net cash provided by (used in)
financing activities 14,232 ( 149) -- 14,083
-------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS 418 ( 25) -- 393
CASH AND TEMPORARY INVESTMENTS,
beginning of period 5,228 74 -- 5,302
-------- ------- ------- -------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 5,646 $ 49 $ -- $ 5,695
======== ======= ======= =======
3. Segment Reporting
The Company has three defined reportable segments: restaurants, franchising,
and fixed base airport hanger operations ("FBO"). 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 rights and collection of royalties from franchisees of the Krystal
brand. The FBO operation consists primarily of aircraft fuel sales and the
leasing of aircraft hanger space. 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:
- ----------------------------------------------------------------------------
April 1, April 2,
(in thousands) 2001 2000
- ----------------------------------------------------------------------------
Revenues:
Restaurants $ 59,298 $ 61,655
Franchising 1,709 1,131
FBO 1,717 1,579
- ----------------------------------------------------------------------------
Total segment revenues $ 62,724 $ 64,365
============================================================================
Depreciation and Amortization
Restaurants $ 3,489 $ 3,336
Franchising 1 1
FBO 79 63
- ----------------------------------------------------------------------------
Total segment depreciation and amortization $ 3,569 $ 3,400
============================================================================
Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
Restaurant $ 2,336 $ 1,086
Franchising 1,260 759
FBO 408 316
- ----------------------------------------------------------------------------
Total segment EBITDA $ 4,004 $ 2,161
============================================================================
April 1, December 31,
2001 2000
- -----------------------------------------------------------------------------
Capital Expenditures:
Restaurants $ 1,193 $ 22,463
Franchising 0 0
FBO 93 1,305
- -------------------------------------------------------------------------------
Total segment capital expenditures $ 1,286 $ 23,768
===============================================================================
Total Assets:
Restaurants $190,770 $194,326
Franchising 1,637 1,599
FBO 2,935 3,515
- -------------------------------------------------------------------------------
Total segment assets $195,342 $199,440
===============================================================================
A reconciliation of segment depreciation and amortization to consolidated
depreciation and amortization is as follows:
- -------------------------------------------------------------------------------
April 1, April 2,
2001 2000
- -------------------------------------------------------------------------------
Segment depreciation and amortization $ 3,569 $ 3,400
Unreported segments (1) 74 51
- -------------------------------------------------------------------------------
Total consolidated depreciation and amortization $ 3,643 $ 3,451
===============================================================================
A reconciliation of segment EBITDA to
consolidated EBITDA is as follows:
Segment EBITDA $ 4,004 $ 2,161
Unreported segments (1) 147 119
- -------------------------------------------------------------------------------
Total consolidated EBITDA $ 4,151 $ 2,280
===============================================================================
A reconciliation of segment total assets to consolidated total assets is as
follows:
- -------------------------------------------------------------------------------
April 1, December 31,
2001 2000
- -------------------------------------------------------------------------------
Total segment assets $195,342 $199,440
Unreported segments (1) 4,082 3,761
- -------------------------------------------------------------------------------
Total consolidated assets $199,424 $203,201
===============================================================================
(1) Unreported segments do not meet the quantitative thresholds for segment
reporting.
4. 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
April 1, 2001 was 9.37%. Availability under the Credit Facility as of
April 1, 2001 was $9.8 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 April 1, 2001, 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.
5. 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 have reached a tentative settlement of this lawsuit and
have requested the court's preliminary approval of the settlement. Under the
proposed class action settlement, the Company will agree to renovate all
wheelchair inaccessible restrooms in Krystal-owned restaurants over a ten
year period. After notice to putative class members, a final hearing was
held on May 3, 2001 for the court to consider final approval of the settlement.
The Company anticipates that the court will render its final decision
concerning approval of the settlement before July 2001. If the settlement is
not approved or the terms of the settlement are materially changed by the
court, the Company could be forced to accelerate capital expenditures on
certain of its existing Krystal restaurants.
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 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the consolidated
financial statements of the Company (including the notes thereto)
contained elsewhere in this report.
Cash operating profit --
Cash operating profit (net income or loss before interest, taxes, depreciation,
amortization and other non-operating gains, losses or expenses) is one of the
key standards used by the Company to measure operating performance. Cash
operating profit is used to supplement operating income as an indicator of
operating performance and cash flows from operating activities as a measure of
liquidity, and not as an alternative to measures defined and required by
generally accepted accounting principles. Cash operating profit may not be
comparable to similarly titled measures reported by other companies.
Cash operating profit for the three months ended April 1, 2001 was $4.1
million compared to $2.3 million for the three months ended April 2, 2000, an
increase of 80.7%. This increase in cash operating profit was primarily
attributable to a decrease in cost of restaurant sales and an increase in
franchise royalties and fees.
The following table reflects certain key operating statistics which impact the
Company's financial results:
KEY OPERATING STATISTICS
(Dollars in thousands except average check)
(Unaudited)
For the Three Months Ended
----------------------------
April 1, April 2
2001 2000
-------- --------
RESTAURANT SALES:
Company owned $ 59,298 $ 61,655
Franchise 28,166 21,867
-------- --------
SYSTEMWIDE RESTAURANT SALES $ 87,464 $ 83,522
Percent change 4.72% ( 0.23%)
COMPANY RESTAURANT STATISTICS:
Number of restaurants 250 255
Restaurant Sales $ 59,298 $ 61,655
Percent change ( 3.82%) ( 2.52%)
Percent change in same restaurant sales (2.55%) ( 6.45%)
Selected components are --
Cost of restaurant sales $ 50,636 $ 54,393
As a percent of restaurant sales 85.39% 88.22%
Food and paper cost $ 18,847 $ 19,809
As a percent of restaurant sales 31.78% 32.13%
Direct labor $ 14,018 $ 16,010
As a percent of restaurant sales 23.64% 25.97%
Other labor costs $ 5,069 $ 5,275
As a percent of restaurant sales 8.55% 8.55%
FRANCHISE SYSTEM STATISTICS:
Number of restaurants 142 120
Restaurant Sales $ 28,166 $ 21,867
Percent change 28.80% 6.85%
Percent change in same restaurant sales (2.78%) (2.25%)
Comparison of the Three Months Ended April 1, 2001
----------------------------------------------------
to the Three Months Ended April 2, 2000
-----------------------------------------
RESULTS OF OPERATIONS
---------------------
Total Krystal systemwide restaurant sales, which included restaurant sales of
$59.3 million for company-owned and $28.2 million for franchised units, for the
three months ended April 1, 2001 increased 4.7% to $87.5 million compared to
$83.5 million for the same period last year.
Total Company revenues decreased 2.5% to $62.7 million in the three months
ended April 1, 2001 compared to $64.4 million in the same period last year.
The $1.6 million decrease was comprised of a $2.4 million decrease in
restaurant sales, offset by a $578,000 increase in royalty and franchise
revenue and a $138,000 increase in other revenue from the Company's aviation
subsidiary. The decrease in restaurant sales was due to a decrease in the
number of Company owned restaurants combined with a decrease in same store
sales. The Company operated 250 restaurants at April 1, 2001 compared to 255
restaurants at April 2, 2000.
Company-owned same restaurant sales decreased 2.6%, compared to the same period
in 2000. The decrease was attributable to a combination of factors, including
softer economic conditions and heavy discounting by competitors, both of which
adversely affected customer traffic in the Company's restaurants. The average
customer check for Company owned restaurants increased 4.6% to $4.58 for the
three months ended April 1, 2001, compared to $4.38 for the same period
in 2000. This increase resulted primarily from price increases implemented
by the Company in May and October of 2000.
The Company's franchisees opened 11 franchised restaurants in the three
months ended April 1, 2001 compared to one in the three months ended
April 2, 2000. The franchise system operated 142 restaurants at
April 1, 2001 compared to 120 at April 2, 2000. Franchise fee income
was $358,000 in the three months ended April 1, 2001 compared to $65,000 in
the three months ended April 2, 2000. Royalty revenue increased 26.7% to
$1.4 million in the three months ended April 1, 2001 from $1.1 million in
the three months ended April 2, 2000. This increase resulted primarily
from a 28.8% increase in franchise restaurant sales.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, was $1.7 million for the three months ended April 1, 2001
compared to $1.6 million for the three months ended April 1, 2000, an 8.7%
increase. This increase in revenue resulted primarily from an increase in
retail jet fuel prices during the three months ended April 1, 2001 compared
to the three months ended April 1, 2000.
Cost of restaurant sales was $50.6 million for the three months ended
April 1, 2001 compared to $54.4 million for the three months ended
April 2, 2000. Food and paper costs as a percent of restaurant sales
decreased to 31.8% in the three months ended April 1, 2001 from 32.1% in the
three months ended April 2, 2000. The decrease in food and paper costs as a
percent of restaurant sales resulted primarily from a decrease in pork, beef
and other commodity pricing and improved cost controls, partially offset by
an increase in sales of the Company's new Chicken Stripper offering. The new
Chicken Stripper has a higher food cost as a percentage of sales, but because
of its higher price, contributes more profit than many of the Company's other
offerings. Direct labor as a percent of restaurant sales decreased to 23.6%
from 26.0% in the prior year. Average wage increased 2.6% from $6.11 last
year to $6.27 this year. This increase was more than offset by improvements
in the utilization of the Company's store level labor tracking systems.
Depreciation and amortization expenses increased $192,000, or 5.6%, to $3.6
million in the three months ended April 1, 2001 versus the same period last
year. The increase resulted primarily from capital expenditures in fiscal
2000 related to refurbishing restaurant buildings, upgrading restaurant
equipment and opening new restaurants.
General and administrative expenses increased $259,000, or 3.9%, to $6.9
million in the three months ended April 1, 2001 versus same period last year.
The increase in general and administrative expenses resulted primarily from
expenses related to additional staffing in the Company's franchise
operation's department.
Other expenses increased $16,000, or 1.5%, to $1.1 million in the three
months ended April 1, 2001 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 April 1, 2001
compared to the same period in 2000.
The Company reported a gain on sale of assets of $30,000 for the three months
ended April 1, 2001 compared to none for the three months ended April 2,
2000. The gain resulted from the sale of a restaurant to a franchisee.
Interest expense, net of interest income, increased $168,000 to $3.3 million in
the three months ended April 1, 2001 from $3.1 million in the three months
ended April 2, 2000. The increase resulted from an increase in interest
expense related to capitalized leases and higher costs related to borrowings
on the Company's Credit Facility.
The Company's provision for income taxes increased $542,000, to a $872,000 tax
benefit from $1.4 million tax benefit in the three months ended April 2, 2000.
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.
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 $19.6 million at April 1, 2001, compared to a
working capital deficit of $21.7 million at December 31, 2000.
Capital expenditures totaled approximately $1.3 million in the three months
ended April 1, 2001 as compared to $9.9 million in the three months ended
April 2, 2000. The Company opened no new restaurants during the three
months ended April 1, 2001 and opened six during the three months ended
April 2, 2000. Management estimates that capital expenditures will be
approximately $12.2 million during the remainder of 2001. Capital
expenditures for the remainder of the current year are expected to include the
refurbishment and remodeling of certain restaurants, ongoing capital
improvements, and the conversion of the restaurant cash register systems.
In August 2000, the Company obtained a sale and leaseback commitment from a
firm for up to $14.0 million of properties to be developed by the Company.
This commitment expires in August 2001. The primary term of leases under this
arrangement is 18 years, with two successive five year renewal options.
At April 1, 2001, the Company had available cash of approximately $4.8
million, receivables of $1.9 million, and $9.8 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 have reached a tentative settlement of this lawsuit and
have requested the court's preliminary approval of the settlement. Under the
proposed class action settlement, the Company will agree to renovate all
wheelchair inaccessible restrooms in Krystal-owned restaurants over a ten
year period. After notice to putative class members, a final hearing was
held on May 3, 2001 for the court to consider final approval of the settlement.
The Company anticipates that the court will render its final decision
concerning approval of the settlement before July 2001. If the settlement is
not approved or the terms of the settlement are materially changed by the
court, the Company could be forced to accelerate capital expenditures on
certain of its existing Krystal restaurants.
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-
No exhibits is filed with this 10-Q.
(b) Reports on Form 8-K-
No Form 8-K was filed by the Registrant during the first quarter
of 2001.
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: 5/10/01 /s/Larry D. Bentley
- --------------- ------------------------
Larry D. Bentley
(Vice President, Chief Financial Officer
and Principal Accounting Officer)