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 July 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
August 9, 2001.
THE KRYSTAL COMPANY
-------------------
July 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 July 1, 2001 and December 31, 2000, and (2) their change in shareholder's
equity for the six months ended July 1, 2001 and (3) the results of their
operations for the three and six months ended July 1, 2001 and July 2, 2000 and
(4) their cash flows for the six months ended July 1, 2001 and July 2, 2000
have been included. The results of operations for the interim period ended
July 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)
July 1, December 31,
2001 2000
(Unaudited)
--------- ----------
ASSETS
- ------
CURRENT ASSETS:
Cash and temporary investments $ 4,686 $ 4,979
Receivables, net 1,824 1,952
Inventories 2,041 1,992
Deferred income taxes 2,785 2,785
Prepayments and other 1,300 802
-------- --------
Total current assets 12,636 12,510
-------- --------
PROPERTY, BUILDINGS, AND EQUIPMENT, net 120,275 123,311
-------- --------
LEASED PROPERTIES, net 10,234 11,323
-------- --------
OTHER ASSETS:
Goodwill, net 41,810 42,794
Prepaid pension asset 8,556 8,358
Deferred financing costs, net 3,005 3,278
Other 1,164 1,627
-------- --------
Total other assets 54,535 56,057
-------- --------
TOTAL ASSETS $197,680 $203,201
======== ========
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
(In thousands)
July 1, December 31,
2001 2000
(Unaudited)
----------- ----------
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,575 $ 7,445
Accrued liabilities 20,583 21,918
Outstanding checks in excess
of bank balance 3,545 2,745
Current portion of long-term debt 277 120
Current portion of capital
lease obligations 2,068 1,962
-------- --------
Total current liabilities 30,048 34,190
-------- --------
LONG-TERM DEBT, excluding current portion 115,834 113,992
-------- --------
CAPITAL LEASE OBLIGATIONS, excluding
current portion 9,254 10,341
-------- --------
DEFERRED INCOME TAXES 10,199 10,279
-------- --------
OTHER LONG-TERM LIABILITIES 1,406 1,360
-------- --------
SHAREHOLDER'S EQUITY:
Common stock, without par value;
100 shares authorized; issued
and outstanding, at July 1, 2001,
and at December 31, 2000 35,000 35,000
Accumulated deficit ( 4,061) ( 1,961)
-------- --------
Total shareholder's equity 30,939 33,039
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $197,680 $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 For the Six
Months Ended Months Ended
-------------------------- ------------------------
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
------- -------- ---------- ----------
REVENUES:
Restaurant sales $ 63,337 $ 66,439 $122,635 $128,094
Franchise fees 145 260 503 325
Royalties 1,485 1,250 2,836 2,316
Other revenue 1,791 1,814 3,508 3,393
------- ------- ------- -------
Total revenues 66,758 69,763 129,482 134,128
------- ------- ------- -------
COST AND OTHER EXPENSES:
Cost of restaurant sales 53,628 55,489 104,264 109,882
Depreciation and amortization
expenses 3,622 3,495 7,265 6,946
General and administrative
expenses 5,864 6,410 12,732 13,019
Other expenses, net 1,092 1,191 2,191 2,274
------- ------- ------- -------
Total operating expenses 64,206 66,585 126,452 132,121
------- ------- ------- -------
OPERATING INCOME 2,552 3,178 3,030 2,007
GAIN ON SALE OF ASSETS 566 -- 596 --
INTEREST EXPENSE, net ( 3,254) ( 3,184) ( 6,559) ( 6,321)
------- ------- ------- -------
LOSS BEFORE (PROVISION FOR)BENEFIT
FROM INCOME TAXES ( 136) ( 6) ( 2,933) ( 4,314)
(PROVISION FOR) BENEFIT FROM
INCOME TAXES ( 39) ( 175) 833 1,239
------- ------- ------- -------
NET LOSS $( 175) $( 181) $( 2,100) $( 3,075)
======= ======= ======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
-----------------------------------------------
FOR THE SIX MONTHS ENDED
------------------------
JULY 1, 2001
------------
(In thousands)
(Unaudited)
Common Retained
Stock Earnings
-------- --------
BALANCE, December 31, 2000 $35,000 $( 1,961)
Net loss -- ( 2,100)
------- -------
BALANCE, July 1, 2001 $35,000 $( 4,061)
======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(Unaudited)
For the Six
Months Ended
----------------------
July 1, July 2,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $( 2,100) $( 3,075)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities-
Depreciation and amortization 7,265 6,946
Change in deferred taxes ( 80) 1,041
Gain on sale of assets ( 596) --
Changes in operating assets and liabilities:
Receivables, net 128 192
Inventories ( 49) 260
Prepayments and other ( 498) 267
Accounts payable ( 3,870) 1,659
Accrued liabilities ( 1,335) ( 2,993)
Other, net 619 ( 123)
-------- --------
Net cash provided by (used in)
operating activities ( 516) 4,174
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings,
and equipment ( 3,579) (21,300)
Proceeds from sale of property,
buildings, and equipment 1,984 4,296
-------- --------
Net cash used in investing activities ( 1,595) (17,004)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit
facility 2,075 17,000
Repayments of long-term debt ( 76) ( 497)
Outstanding checks in excess of
bank balance 800 ( 2,842)
Principal payments of
capital lease obligations ( 981) ( 864)
-------- --------
Net cash provided by
financing activities 1,818 12,797
-------- --------
NET DECREASE IN CASH AND
TEMPORARY INVESTMENTS ( 293) ( 33)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 4,979 5,302
-------- --------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 4,686 $ 5,269
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 6,395 $ 6,237
======= =======
Income taxes $ 69 $ 670
======= =======
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 $49,257,500 and deferred financing costs of $5,783,000 at July 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
July 1, 2001 was $491,900 and $135,900, respectively and for the three months
ended July 2, 2000 was $499,300 and $181,400, respectively. Amortization
expense for goodwill and deferred financing costs for the six months ended
July 1, 2001 was $983,800 and $271,700, respectively and for the six months
ended July 2, 2000 was $998,500 and $386,900, respectively. Accumulated
amortization of goodwill at July 1, 2001 and July 2, 2000 was $7,447,100
and $5,477,000, respectively. Accumulated amortization of deferred
financing costs at July 1, 2001 and July 2, 2000 was $2,778,300 and
$2,236,500, respectively.
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets" (collectively the "Standards"). The Standards will be
effective for fiscal years beginning after December 15, 2001. SFAS No. 141
will require companies to recognize acquired identifiable intangible assets
separately from goodwill if certain conditions are met. The Standards will
require the value of separately identifiable intangible assets to be measured
at fair value. SFAS No. 142 will require that goodwill not be amortized, but
that amounts recorded as goodwill be periodically tested for value impairment.
Upon adoption of SFAS No. 142, if the value of goodwill is determined to be
impaired, the Company will be required to reduce goodwill through a charge to
earnings. There will be no financial statement impact on the Company related
to the Standards in fiscal year 2001. Based on the current levels of goodwill,
the adoption of the Standards in fiscal 2002 would decrease annual amortization
expense by approximately $1,967,600 through the elimination of goodwill
amortization. The Company has not yet determined the impact of the new
goodwill impairment standards.
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 July 1, 2001, there were 148 franchised
or licensed restaurants and at July 2, 2000, there were 127 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 July 1, 2001 and December 31, 2000 and the six
months ended July 1, 2001 and July 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 July 1, 2001 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
----------- ---------- ----------- -----------
Current Assets:
Cash and temporary investments $ 4,686 $ -- $ -- $ 4,686
Receivables, net (8,335) 325 9,834 1,824
Inventories 1,991 50 -- 2,041
Deferred income taxes 2,752 33 -- 2,785
Prepayments and other 1,278 22 -- 1,300
-------- ------- ------- --------
Total current assets 2,372 430 9,834 12,636
-------- ------- ------- --------
Property, buildings, and equipment, net 115,638 4,637 -- 120,275
-------- ------- ------- --------
Leased Properties, net 10,234 -- -- 10,234
-------- ------- ------- --------
Investment in Subsidiary 1 1 (2) --
-------- ------- ------- --------
Other Assets:
Goodwill, net 41,810 -- -- 41,810
Prepaid pension asset 8,556 -- -- 8,556
Deferred financing costs, net 3,005 -- -- 3,005
Other 1,146 18 1,164
-------- ------- ------- --------
Total other assets 54,517 18 -- 54,535
-------- ------- ------- --------
Total Assets $182,762 $ 5,086 $ 9,832 $197,680
======== ======= ======= ========
Current Liabilities:
Accounts payable $ (6,316) $ 57 $ 9,834 $ 3,575
Accrued liabilities 20,259 324 -- 20,583
Outstanding checks in excess
of bank balance 3,503 42 -- 3,545
Current portion of long-term debt -- -- 277 277
Current portion of capital lease
obligations 2,068 -- -- 2,068
-------- ------- ------- --------
Total current liabilities 19,514 423 10,111 30,048
-------- ------- ------- --------
Long Term Debt, excluding current
portion 114,170 1,941 ( 277) 115,834
-------- ------- ------- --------
Capital Lease Obligations, excluding
current portion 9,254 -- -- 9,254
-------- ------- ------- --------
Deferred Income Taxes 10,728 ( 529) -- 10,199
-------- ------- ------- --------
Other Long-Term Liabilities 1,406 -- -- 1,406
-------- ------- ------- --------
Shareholder's Equity:
Common Stock 35,000 2 (2) 35,000
Retained Earnings (7,310) 3,249 -- (4,061)
-------- ------- ------- --------
Total shareholder's equity 27,690 3,251 (2) 30,939
-------- ------- ------- --------
Total Liabilities and Shareholder's
Equity $182,762 $ 5,086 $ 9,832 $197,680
======== ======= ======= ========
CONDENSED CONSOLIDATING BALANCE SHEET
At December 31, 2000 (Unaudited)
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 six months ended July 1, 2001 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
REVENUES:
Restaurant sales $122,635 $ -- $ -- $122,635
Franchise fees 503 -- -- 503
Royalties 2,836 -- -- 2,836
Other revenue -- 3,508 -- 3,508
-------- ------- ------- --------
Total revenues 125,974 3,508 -- 129,482
-------- ------- ------- --------
COST AND OTHER EXPENSES:
Cost of restaurant sales 104,264 -- -- 104,264
Depreciation and amortization
expense 7,010 255 -- 7,265
General and administrative
expenses 12,605 127 -- 12,732
Other expenses, net ( 258) 2,449 -- 2,191
-------- ------- ------- --------
Total operating expenses 123,621 2,831 -- 126,452
-------- ------- ------- --------
OPERATING INCOME 2,353 677 -- 3,030
GAIN ON SALE OF ASSETS 596 -- -- 596
INTEREST EXPENSE, net ( 6,486) ( 73) -- ( 6,559)
-------- ------- ------- --------
INCOME (LOSS) BEFORE (PROVISION
FOR) BENEFIT FROM INCOME TAXES ( 3,537) 604 -- ( 2,933)
(PROVISION FOR) BENEFIT FROM
INCOME TAXES 1,062 ( 229) -- 833
-------- ------- ------- --------
NET INCOME (LOSS) $( 2,475) $ 375 $ -- $( 2,100)
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the six months ended July 2, 2000 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
REVENUES:
Restaurant sales $128,094 $ -- $ -- $128,094
Franchise fees 325 -- -- 325
Royalties 2,316 -- -- 2,316
Other revenue -- 3,393 -- 3,393
-------- ------- ------- --------
Total revenues 130,735 3,393 -- 134,128
-------- ------- ------- --------
COST AND OTHER EXPENSES:
Cost of restaurant sales 109,882 -- -- 109,882
Depreciation and amortization
expense 6,735 211 -- 6,946
General and administrative
expenses 12,902 117 -- 13,019
Other expenses, net (207) 2,481 -- 2,274
-------- ------- ------- --------
Total operating expenses 129,312 2,809 -- 132,121
-------- ------- ------- --------
OPERATING INCOME 1,423 584 -- 2,007
GAIN ON SALE OF ASSETS -- -- -- --
INTEREST INCOME (EXPENSE), net ( 6,322) 1 -- ( 6,321)
-------- ------- ------- --------
INCOME (LOSS) BEFORE (PROVISION
FOR) BENEFIT FROM INCOME TAXES ( 4,899) 585 -- ( 4,314)
(PROVISION FOR) BENEFIT FROM
INCOME TAXES 1,462 ( 223) -- 1,239
-------- ------- ------- --------
NET INCOME (LOSS) $( 3,437) $ 362 $ -- $( 3,075)
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended July 1, 2001 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,475) $ 375 $ -- $( 2,100)
Adjustments to reconcile net
income (loss) to net cash used in
operating activities -
Depreciation and amortization 7,010 255 -- 7,265
Change in deferred income taxes ( 80) -- -- ( 80)
Gain on sale of assets ( 596) -- -- ( 596)
Changes in operating assets and
liabilities:
Receivables, net ( 62) 190 -- 128
Inventories ( 49) -- -- ( 49)
Prepayments and other ( 543) 45 -- ( 498)
Accounts payable (2,861) ( 1,009) -- ( 3,870)
Accrued liabilities (1,199) ( 136) -- ( 1,335)
Other, net 619 -- -- 619
-------- ------- ------- --------
Net cash used in
operating activities ( 236) ( 280) -- ( 516)
-------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment ( 3,463) ( 116) -- ( 3,579)
Proceeds from the sale of property,
buildings and equipment 1,984 -- -- 1,984
-------- ------- ------- --------
Net cash used in investing
activities ( 1,479) ( 116) -- ( 1,595)
-------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under
revolving credit facility 2,075 -- -- 2,075
Repayments of long-term debt ( 5) ( 71) -- ( 76)
Outstanding checks in excess of
bank balance 758 42 -- 800
Principal payments of capital
lease obligations ( 981) -- -- ( 981)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities 1,847 ( 29) -- 1,818
-------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS 132 ( 425) -- ( 293)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 4,554 425 -- 4,979
-------- -------- ------- --------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 4,686 $ -- $ -- $ 4,686
======== ======== ======= ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended July 2, 2000 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- -------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $( 3,437) $ 362 $ -- $( 3,075)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities -
Depreciation and amortization 6,735 211 -- 6,946
Change in deferred income taxes 1,041 -- -- 1,041
Changes in operating assets and
liabilities:
Receivables, net 248 ( 56) -- 192
Inventories 238 22 -- 260
Prepayments and other 236 31 -- 267
Accounts payable 2,001 ( 342) -- 1,659
Accrued liabilities ( 2,685) ( 308) -- ( 2,993)
Other, net ( 104) ( 19) -- ( 123)
-------- -------- ------- -------
Net cash provided by (used in)
operating activities 4,273 ( 99) -- 4,174
-------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment (19,662) (1,638) -- (21,300)
Proceeds from the sale property,
buildings and equipment 4,296 -- -- 4,296
-------- ------- ------- -------
Net cash used in investing
activities (15,366) (1,638) -- (17,004)
-------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under
revolving credit facility 15,000 2,000 -- 17,000
Repayments of long-term debt ( 466) ( 31) -- ( 497)
Outstanding checks in excess of
bank balance ( 2,709) ( 133) -- ( 2,842)
Principal payments of capital
lease obligations ( 864) -- -- ( 864)
-------- ------- ------- -------
Net cash provided by
financing activities 10,961 1,836 -- 12,797
-------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS ( 132) 99 -- ( 33)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 5,228 74 -- 5,302
-------- ------- ------- -------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 5,096 $ 173 $ -- $ 5,269
======== ======= ======= =======
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:
- ----------------------------------------------------------------------------
July 1, July 2,
(in thousands) 2001 2000
- ----------------------------------------------------------------------------
Revenues:
Restaurants $122,635 $128,094
Franchising 3,339 2,641
FBO 3,508 3,393
- ----------------------------------------------------------------------------
Total segment revenues $129,482 $134,128
============================================================================
Depreciation and Amortization
Restaurants $ 6,959 $ 6,702
Franchising 2 2
FBO 155 126
- ----------------------------------------------------------------------------
Total segment depreciation and amortization $ 7,116 $ 6,830
============================================================================
Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
Restaurant $ 6,693 $ 5,987
Franchising 2,412 1,964
FBO 889 752
- ----------------------------------------------------------------------------
Total segment EBITDA $ 9,994 $ 8,703
============================================================================
July 1, December 31,
2001 2000
- -----------------------------------------------------------------------------
Capital Expenditures:
Restaurants $ 3,463 $ 22,463
Franchising 0 0
FBO 116 1,305
- -------------------------------------------------------------------------------
Total segment capital expenditures $ 3,579 $ 23,768
===============================================================================
Total Assets:
Restaurants $189,144 $194,326
Franchising 1,709 1,599
FBO 2,829 3,515
- -------------------------------------------------------------------------------
Total segment assets $193,682 $199,440
===============================================================================
A reconciliation of segment depreciation and amortization to consolidated
depreciation and amortization is as follows:
- -------------------------------------------------------------------------------
July 1, July 2,
2001 2000
- -------------------------------------------------------------------------------
Segment depreciation and amortization $ 7,116 $ 6,830
Unreported segments (1) 149 116
- -------------------------------------------------------------------------------
Total consolidated depreciation and amortization $ 7,265 $ 6,946
===============================================================================
A reconciliation of segment EBITDA to
consolidated EBITDA is as follows:
Segment EBITDA $ 9,994 $ 8,703
Unreported segments (1) 301 250
- -------------------------------------------------------------------------------
Total consolidated EBITDA $ 10,295 $ 8,953
===============================================================================
A reconciliation of segment total assets to consolidated total assets is as
follows:
- -------------------------------------------------------------------------------
July 1, December 31,
2001 2000
- -------------------------------------------------------------------------------
Total segment assets $193,682 $199,440
Unreported segments (1) 3,998 3,761
- -------------------------------------------------------------------------------
Total consolidated assets $197,680 $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
July 1, 2001 was 7.75%. Availability under the Credit Facility as of
July 1, 2001 was $8.3 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 July 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 sought class action status on behalf of all wheelchair bound patrons
of the Company's restaurants who have been denied access to restrooms. On
July 12, 2001, a judgment was entered by the court that ordered the
provisional certification of the settlement class be made final and ratified,
affirmed and adopted the court's preliminary approval of the terms of
settlement between the plaintiff and the Company which, among other things,
requires the Company to renovate all wheelchair inaccessible restrooms in
Krystal-owned restaurants over a ten year period beginning in 2002.
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 July 1, 2001 was $6.2
million compared to $6.7 million for the three months ended July 2, 2000, a
decrease of 7.5%. This decrease in cash operating profit was primarily
attributable to a decrease in the number of Company operated restaurants, a
decrease in same restaurant sales and an increase in cost of restaurant
sales as a percentage of restaurant sales.
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 For the Six
Months Ended Months Ended
-------------------- ---------------------
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
-------- -------- --------- --------
RESTAURANT SALES:
Company owned $ 63,337 $ 66,439 $122,635 $128,094
Franchise 31,263 25,614 59,429 47,482
-------- -------- -------- --------
SYSTEMWIDE RESTAURANT SALES $ 94,600 $ 92,053 $182,064 $175,576
Percent change 2.77% 5.75% 3.70% 2.82%
COMPANY RESTAURANT STATISTICS:
Number of restaurants 247 260 247 260
Restaurant Sales $ 63,337 $ 66,439 $122,635 $128,094
Percent change ( 4.67%) 2.61% ( 4.26%) 0.08%
Percent change in same restaurant sales ( 1.38%) ( 3.25%) ( 1.95%) ( 4.82%)
Selected components are --
Cost of restaurant sales $ 53,628 $ 55,489 $104,264 $109,882
As a percent of restaurant sales 84.67% 83.51% 85.02% 85.77%
Food and paper cost $ 20,953 $ 21,771 $ 39,800 $ 41,580
As a percent of restaurant sales 33.08% 32.77% 32.45% 32.46%
Direct labor $ 14,345 $ 15,445 $ 28,363 $ 31,455
As a percent of restaurant sales 22.65% 23.25% 23.13% 24.56%
Other labor costs $ 4,927 $ 5,006 $ 9,996 $ 10,281
As a percent of restaurant sales 7.78% 7.53% 8.15% 8.03%
FRANCHISE SYSTEM STATISTICS:
Number of restaurants 148 127 148 127
Restaurant Sales $ 31,263 $ 25,614 $ 59,429 $ 47,482
Percent change 22.05% 14.88% 25.16% 11.04%
Percent change in same restaurant sales (3.45%) 0.51% (3.13%) (0.86%)
Comparison of the Three Months Ended July 1, 2001
-------------------------------------------------
to the Three Months Ended July 2, 2000
--------------------------------------
RESULTS OF OPERATIONS
---------------------
Total Krystal systemwide restaurant sales, which included restaurant sales of
$63.3 million for Company-owned and $31.3 million for franchised units, for the
three months ended July 1, 2001 increased 2.8% to $94.6 million compared to
$92.1 million for the same period last year.
Total Company revenues decreased 4.3% to $66.8 million in the three months
ended July 1, 2001 compared to $69.8 million in the same period last year.
The $3.0 million decrease was comprised of a $3.1 million decrease in
restaurant sales, offset by a $100,000 increase in royalty and franchise
revenue. 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 247 restaurants at July 1, 2001 compared to 260
restaurants at July 2, 2000. The 13 store decrease in Company operated units
resulted from the Company's sale (re-franchising) of eight restaurants, which
were sold in connection with the execution of new store development commitments
by franchisees, and the closure of five under performing units.
Company-owned same restaurant sales decreased 1.38%, 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 2.0% to $4.69 for the
three months ended July 1, 2001, compared to $4.60 for the same period
in 2000. This increase resulted primarily from price increases implemented
by the Company in May and October of 2000.
Franchise fee income was $145,000 in the three months ended July 1, 2001
compared to $260,000 in the three months ended July 2, 2000. Royalty revenue
increased 18.8% to $1.5 million in the three months ended July 1, 2001 from
$1.3 million in the three months ended July 2, 2000. The decrease in
franchise fees, which are earned upon the opening of new restaurants, resulted
from a decrease in the number of new franchise restaurants opened compared
to the same period in 2000. During the three months ended July 1, 2001,
franchisees opened four new restaurants, and re-opened three additional
restaurants that had been temporarily closed. There were no franchise fees
associated with the re-opened restaurants. During the three months ended
July 2, 2000, franchisees opened eight new franchise restaurants. The
increase in franchise royalties was due to a 22.05% increase in franchise
system sales compared to the same period in 2000 resulting from a 16.5%
increase in the number of franchisee operated restaurants. The franchise
system operated 148 restaurants at July 1, 2001 compared to 127 at
July 2, 2000.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, was $1.8 million for the three months ended July 1, 2001 and
for the three months ended July 2, 2000.
Cost of restaurant sales was $53.6 million for the three months ended
July 1, 2001 compared to $55.5 million for the three months ended
July 2, 2000. Food and paper costs as a percent of restaurant sales
increased to 33.1% in the three months ended July 1, 2001 from 32.8% in the
three months ended July 2, 2000. The increase in food and paper costs as a
percent of restaurant sales resulted primarily from an increase in pork, beef,
cheese and other commodity pricing, an increase in sales of the Company's new
Steak and Cheese sandwich offering, all partially offset by improved cost
controls. The new Steak and Cheese sandwich had a higher food cost as a
percentage of sales than most of the Company's other menu offerings. Direct
labor as a percent of restaurant sales was 22.7% during the three months ended
July 1, 2001, compared to 23.3% in the same period in 2000. Average
wage increased 1.8% to $6.35 during the three months ended July 1, 2001,
compared to $6.24 in the same period in 2000. This increase was more than
offset by an increase in labor efficiency resulting from increased efforts
by management and improvements in the utilization of the Company's store level
labor management systems.
Depreciation and amortization expenses increased $127,000, or 3.6%, to $3.6
million in the three months ended July 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 decreased $546,000, or 8.5%, to $5.9
million in the three months ended July 1, 2001 versus same period last year.
The decrease in general and administrative expenses resulted primarily from
the reduction of expenses related to advertising, pension and other controllable
expenses.
Other expenses decreased $99,000, or 8.3%, to $1.1 million in the three
months ended July 1, 2001 versus the same period last year. This decrease
resulted primarily from a decrease in the wholesale cost of jet fuel purchased
by the Company's aviation subsidiary in the three months ended July 1, 2001
compared to the same period in 2000.
The Company reported a gain on sale of assets of $566,000 for the three months
ended July 1, 2001 compared to none for the three months ended July 2,
2000. The gain resulted from the sale of a restaurant to a franchisee and
the sale of other non-operating properties.
Interest expense, net of interest income, increased $70,000 to $3.3 million in
the three months ended July 1, 2001 from $3.2 million in the three months
ended July 2, 2000. This increase resulted primarily from a decrease in
interest income of $100,000 in the three months ended July 1, 2001 compared to
the same period in 2000. Also contributing to the increase was an increase in
capital lease interest expense associated with three sale-leaseback
transactions undertaken in September 2000. These increases were partially
offset by a decrease in interest rates on borrowings under the Company's
Credit Facility as well as a $3.2 million decrease in long-term debt.
The Company's provision for income taxes decreased $136,000, to a $39,000 tax
expense from $175,000 tax expense in the three months ended July 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.
Comparison of the Six Months Ended July 1, 2001
-----------------------------------------------
to the Six Months Ended July 2, 2000
------------------------------------
RESULTS OF OPERATIONS
---------------------
Total Krystal systemwide restaurant sales, which included restaurant sales of
$122.6 million for Company-owned and $59.5 million for franchised units, for the
six months ended July 1, 2001 increased 3.7% to $182.1 million compared to
$175.6 million for the same period last year.
Total Company revenues decreased 3.5% to $129.5 million in the six months
ended July 1, 2001 compared to $134.1 million in the same period last year.
The $4.6 million decrease was comprised of a $5.5 million decrease in
restaurant sales, offset by a $698,000 increase in royalty and franchise
revenue and a $115,000 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 247 restaurants at July 1, 2001 compared to 260
restaurants at July 2, 2000. The 13 store decrease in Company operated units
resulted from the Company's sale (re-franchising) of eight restaurants, which
were sold in connection with the execution of new store development commitments
by franchisees, and the closure of five under performing units.
Company-owned same restaurant sales decreased 1.95%, 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 3.3% to $4.64 for the
six months ended July 1, 2001, compared to $4.49 for the same period
in 2000. This increase resulted primarily from price increases implemented
by the Company in May and October of 2000.
Franchise fee income was $503,000 in the six months ended July 1, 2001
compared to $325,000 in the six months ended July 2, 2000. Royalty revenue
increased 22.5% to $2.8 million in the six months ended July 1, 2001 from
$2.3 million in the six months ended July 2, 2000. The increase in
franchise fees, which are earned upon the opening of new restaurants, resulted
from an increase in the number of new franchise restaurants opened compared
to the same period in 2000. During the six months ended July 1, 2001,
franchisees opened 15 new restaurants, and re-opened three additional
restaurants that had been temporarily closed. There were no franchise fees
associated with the re-opened restaurants. During the six months ended
July 2, 2000, franchisees opened 10 new franchise restaurants. The increase
in franchise royalties was due to a 25.2% increase in franchise system sales
compared to the same period in 2000 resulting from a 16.5% increase in the
number of franchisee operated restaurants. The franchise system operated 148
restaurants at July 1, 2001 compared to 127 at July 2, 2000.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, was $3.5 million for the six months ended July 1, 2001
compared to $3.4 million for the six months ended July 2, 2000, a 3.4%
increase. This increase in revenue resulted primarily from an increase in
retail jet fuel prices during the six months ended July 1, 2001 compared
to the six months ended July 2, 2000.
Cost of restaurant sales was $104.3 million for the six months ended
July 1, 2001 compared to $109.9 million for the six months ended
July 2, 2000. Food and paper costs as a percent of restaurant sales
was the same in the six months ended July 1, 2001 and in the six
months ended July 2, 2000 at 32.5%. Direct labor as a percent of
restaurant sales was 23.1% during the six months ended July 1, 2001,
compared to 24.6% in the same period in 2000. Average wage increased 1.8% to
$6.34 during the six months ended July 1, 2001, compared to $6.23 in the same
period in 2000. This increase was more than offset by improvements in the
utilization of the Company's store level labor management systems.
Depreciation and amortization expenses increased $319,000, or 4.6%, to $7.3
million in the six months ended July 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 decreased $287,000, or 2.2%, to $12.7
million in the six months ended July 1, 2001 versus same period last year.
The decrease in general and administrative expenses resulted primarily from
decreased expenditures in advertising, pension and other related expenses.
Other expenses decreased $83,000, or 3.7%, to $2.2 million in the six
months ended July 1, 2001 versus the same period last year. This decrease
resulted primarily from decreases in the wholesale cost of jet fuel purchased
by the Company's aviation subsidiary in the six months ended July 1, 2001
compared to the same period in 2000.
The Company reported a gain on sale of assets of $596,000 for the six months
ended July 1, 2001 compared to none for the six months ended July 2,
2000. The gain resulted from the sale of two restaurants to franchisees
and the sale of other non-operating properties.
Interest expense, net of interest income increased $238,000 to $6.6 million in
the six months ended July 1, 2001 from $6.3 million in the six months
ended July 2, 2000. This increase resulted primarily from a decrease in
interest income related to the funding of construction of new stores. Also
contributing to the increase was an increase in capital lease interest expense
associated with three recent sale-leaseback transactions. These increases
were partially offset by a decrease in interest rates on borrowings under the
Company's Credit Facility as well as a $3.2 million decrease in long-term debt.
The Company's provision for income taxes increased $406,000, to a $833,000 tax
benefit from $1.2 million tax benefit in the six months ended July 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 $17.4 million at July 1, 2001, compared to a
working capital deficit of $21.7 million at December 31, 2000.
Capital expenditures totaled approximately $3.6 million in the six months
ended July 1, 2001 as compared to $21.3 million in the six months ended
July 2, 2000. The Company opened no new restaurants during the six
months ended July 1, 2001 compared to 12 opened during the six months ended
July 2, 2000. Management estimates that capital expenditures will be
approximately $3.5 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 and ongoing capital
improvements.
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 July 1, 2001, the Company had available cash of approximately $4.7
million, receivables of $1.8 million, and $8.3 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.
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets" (collectively the "Standards"). The Standards will be
effective for fiscal years beginning after December 15, 2001. SFAS No. 141
will require companies to recognize acquired identifiable intangible assets
separately from goodwill if certain conditions are met. The Standards will
require the value of separately identifiable intangible assets to be measured
at fair value. SFAS No. 142 will require that goodwill not be amortized, but
that amounts recorded as goodwill be periodically tested for value impairment.
Upon adoption of SFAS No. 142, if the value of goodwill is determined to be
impaired, the Company will be required to reduce goodwill through a charge to
earnings. There will be no financial statement impact on the Company related
to the Standards in fiscal year 2001. Based on the current levels of goodwill,
the adoption of the Standards in fiscal 2002 would decrease annual amortization
expense by approximately $1,967,600 through the elimination of goodwill
amortization. The Company has not yet determined the impact of the new
goodwill impairment standards.
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 sought class action status on behalf of all wheelchair bound patrons
of the Company's restaurants who have been denied access to restrooms. On
July 12, 2001, a judgment was entered by the court that ordered the
provisional certification of the settlement class be made final and ratified,
affirmed and adopted the court's preliminary approval of the terms of
settlement between the plaintiff and the Company which, among other things,
requires the Company to renovate all wheelchair inaccessible restrooms in
Krystal-owned restaurants over a ten year period beginning in 2002.
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 4. Submission of Matters to a Vote of Security Holders
By unanimous written consent dated as of April 19, 2001, Port Royal Holdings,
Inc., the Company's sole shareholder, elected the following directors for the
Company: Philip H. Sanford, James F. Exum, Jr., Andrew G. Cope,
S. K. Johnston III, W. A. Bryan Patten, Richard C. Patton, Benjamin R.
Probasco and A. Alexander Taylor II.
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 second 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: 8/9/01 /s/Larry D. Bentley
- --------------- ------------------------
Larry D. Bentley
(Vice President, Chief Financial Officer
and Principal Accounting Officer)
1
1