FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from to
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Commission file number 0-20040
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THE KRYSTAL COMPANY
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(Exact name of registrant as specified in its charter)
TENNESSEE 62-0264140
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(State or other jurisdiction of (IRS Employer identification
incorporation or organization) Number)
One Union Square, Chattanooga, TN 37402
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(Address of principal executive offices, including zip code)
(423) 757-1550
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
---- ----
This report is filed by the Company pursuant to Section 15(d) of the
Securities Exchange Act of 1934. The Company has 100 shares of common
stock outstanding held of record by Port Royal Holdings, Inc. as of
November 1, 2001.
THE KRYSTAL COMPANY
-------------------
September 30, 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 September 30, 2001 and December 31, 2000, and (2) their change in
shareholder's equity for the nine months ended September 30, 2001 and (3) the
results of their operations for the three and nine months ended
September 30, 2001 and October 1, 2000 and (4) their cash flows for the nine
months ended September 30, 2001 and October 1, 2000 have been included. The
results of operations for the interim period ended September 30, 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
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CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
September 30, December 31,
2001 2000
(Unaudited)
--------- ----------
ASSETS
------
CURRENT ASSETS:
Cash and temporary investments $ 4,388 $ 4,979
Receivables, net 1,812 1,952
Inventories 1,989 1,992
Deferred income taxes 2,785 2,785
Prepayments and other 968 802
-------- --------
Total current assets 11,942 12,510
-------- --------
PROPERTY, BUILDINGS, AND EQUIPMENT, net 118,322 123,311
-------- --------
LEASED PROPERTIES, net 9,689 11,323
-------- --------
OTHER ASSETS:
Goodwill, net 41,250 42,794
Prepaid pension asset 8,655 8,358
Deferred financing costs, net 2,869 3,278
Other 1,142 1,627
-------- --------
Total other assets 53,916 56,057
-------- --------
TOTAL ASSETS $193,869 $203,201
======== ========
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
(In thousands)
September 30, December 31,
2001 2000
(Unaudited)
----------- ----------
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,258 $ 7,445
Accrued liabilities 21,306 21,918
Outstanding checks in excess
of bank balance 2,947 2,745
Current portion of long-term debt 303 120
Current portion of capital
lease obligations 2,100 1,962
-------- --------
Total current liabilities 29,914 34,190
-------- --------
LONG-TERM DEBT, excluding current portion 113,943 113,992
-------- --------
CAPITAL LEASE OBLIGATIONS, excluding
current portion 8,717 10,341
-------- --------
DEFERRED INCOME TAXES 10,159 10,279
-------- --------
OTHER LONG-TERM LIABILITIES 1,429 1,360
-------- --------
SHAREHOLDER'S EQUITY:
Common stock, without par value;
100 shares authorized; issued
and outstanding, at September 30, 2001,
and at December 31, 2000 35,000 35,000
Accumulated deficit ( 5,293) ( 1,961)
-------- --------
Total shareholder's equity 29,707 33,039
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $193,869 $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 Nine
Months Ended Months Ended
-------------------------- ------------------------
Sept. 30, Oct. 1, Sept. 30, Oct. 1,
2001 2000 2001 2000
------- -------- ---------- ----------
REVENUES:
Restaurant sales $ 61,703 $ 63,802 $184,311 $191,896
Franchise fees 173 303 676 628
Royalties 1,541 1,301 4,377 3,617
Other revenue 1,598 1,780 5,106 5,173
------- ------- ------- -------
Total revenues 65,015 67,186 194,470 201,314
------- ------- ------- -------
COST AND OTHER EXPENSES:
Cost of restaurant sales 52,085 53,266 156,322 163,148
Depreciation and amortization
expenses 3,619 3,550 10,884 10,496
General and administrative
expenses 6,547 6,842 19,279 19,861
Other expenses, net 1,292 1,202 3,483 3,476
------- ------- ------- -------
Total operating expenses 63,543 64,860 189,968 196,981
------- ------- ------- -------
OPERATING INCOME 1,472 2,326 4,502 4,333
GAIN (LOSS) ON SALE OF ASSETS ( 48) 199 548 199
INTEREST EXPENSE, net ( 3,183) ( 3,285) ( 9,742) ( 9,606)
------- ------- ------- -------
LOSS BEFORE BENEFIT FROM
INCOME TAXES ( 1,759) ( 760) ( 4,692) ( 5,074)
BENEFIT FROM INCOME TAXES 527 112 1,360 1,351
------- ------- ------- -------
NET LOSS $( 1,232) $( 648) $( 3,332) $( 3,723)
======= ======= ======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
-----------------------------------------------
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 30, 2001
------------------
(In thousands)
(Unaudited)
Common Retained
Stock Earnings
-------- --------
BALANCE, December 31, 2000 $35,000 $( 1,961)
Net loss -- ( 3,332)
------- -------
BALANCE, September 30, 2001 $35,000 $( 5,293)
======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(Unaudited)
For the Nine
Months Ended
----------------------
September 30, October 1,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $( 3,332) $( 3,723)
Adjustments to reconcile net loss
to net cash provided by
operating activities-
Depreciation and amortization 10,884 10,496
Change in deferred taxes ( 120) ( 278)
Gain on sale of assets ( 548) ( 199)
Loss on impaired assets 345 -
Changes in operating assets and liabilities:
Receivables, net 140 50
Inventories 3 231
Prepayments and other ( 166) 319
Accounts payable ( 4,187) ( 58)
Accrued liabilities ( 612) ( 1,874)
Other, net 729 596
-------- --------
Net cash provided by
operating activities 3,136 5,560
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings,
and equipment ( 4,801) (24,590)
Proceeds from sale of property,
buildings, and equipment 2,224 8,962
-------- --------
Net cash used in investing activities ( 2,577) (15,628)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit
facility 254 13,539
Long-term debt borrowing - 2,000
Repayments of long-term debt ( 120) ( 89)
Outstanding checks in excess of
bank balance 202 ( 3,701)
Principal payments of
capital lease obligations ( 1,486) ( 1,313)
-------- --------
Net cash provided by (used in)
financing activities ( 1,150) 10,436
-------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS ( 591) 368
CASH AND TEMPORARY INVESTMENTS,
beginning of period 4,979 5,302
-------- --------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 4,388 $ 5,670
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 6,587 $ 6,989
======= =======
Income taxes $ 97 $ 694
======= =======
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 $49,189,400 and deferred financing costs of $5,783,400 at
September 30, 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
September 30, 2001 was $491,900 and $135,900, respectively and for the three
months ended October 1, 2000 was $494,300 and $135,000, respectively.
Amortization expense for goodwill and deferred financing costs for the nine
months ended September 30, 2001 was $1,475,700 and $407,600, respectively and
for the nine months ended October 1, 2000 was $1,493,000 and $521,700,
respectively. Accumulated amortization of goodwill at September 30, 2001 and
October 1, 2000 was $7,939,000 and $5,971,000, respectively. Accumulated
amortization of deferred financing costs at September 30, 2001 and
October 1, 2000 was $2,914,100 and $2,371,200, 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 September 30, 2001, there were 155
franchised or licensed restaurants and at October 1, 2000, there were 133
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 September 30, 2001 and December 31, 2000 and the
nine months ended September 30, 2001 and October 1, 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 September 30, 2001 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
----------- ---------- ----------- -----------
Current Assets:
Cash and temporary investments $ 4,323 $ 65 $ -- $ 4,388
Receivables, net (9,763) 285 11,290 1,812
Inventories 1,931 58 -- 1,989
Deferred income taxes 2,752 33 -- 2,785
Prepayments and other 968 -- -- 968
-------- ------- ------- --------
Total current assets 211 441 11,290 11,942
-------- ------- ------- --------
Property, buildings, and equipment, net 113,795 4,527 -- 118,322
-------- ------- ------- --------
Leased Properties, net 9,689 -- -- 9,689
-------- ------- ------- --------
Investment in Subsidiary 1 1 (2) --
-------- ------- ------- --------
Other Assets:
Goodwill, net 41,250 -- -- 41,250
Prepaid pension asset 8,655 -- -- 8,655
Deferred financing costs, net 2,869 -- -- 2,869
Other 1,124 18 1,142
-------- ------- ------- --------
Total other assets 53,898 18 -- 53,916
-------- ------- ------- --------
Total Assets $177,594 $ 4,987 $11,288 $193,869
======== ======= ======= ========
Current Liabilities:
Accounts payable $ (7,808) $( 224) $11,290 $ 3,258
Accrued liabilities 20,887 419 -- 21,306
Outstanding checks in excess
of bank balance 2,947 -- -- 2,947
Current portion of long-term debt -- -- 303 303
Current portion of capital lease
obligations 2,100 -- -- 2,100
-------- ------- ------- --------
Total current liabilities 18,126 195 11,593 29,914
-------- ------- ------- --------
Long-Term Debt, excluding current
portion 112,349 1,897 ( 303) 113,943
-------- ------- ------- --------
Capital Lease Obligations, excluding
current portion 8,717 -- -- 8,717
-------- ------- ------- --------
Deferred Income Taxes 10,688 ( 529) -- 10,159
-------- ------- ------- --------
Other Long-Term Liabilities 1,429 -- -- 1,429
-------- ------- ------- --------
Shareholder's Equity:
Common Stock 35,000 2 (2) 35,000
Retained Earnings (8,715) 3,422 -- (5,293)
-------- ------- ------- --------
Total shareholder's equity 26,285 3,424 (2) 29,707
-------- ------- ------- --------
Total Liabilities and Shareholder's
Equity $177,594 $ 4,987 $11,288 $193,869
======== ======= ======= ========
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 nine months ended September 30, 2001 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
REVENUES:
Restaurant sales $184,311 $ -- $ -- $184,311
Franchise fees 676 -- -- 676
Royalties 4,377 -- -- 4,377
Other revenue -- 5,106 -- 5,106
-------- ------- ------- --------
Total revenues 189,364 5,106 -- 194,470
-------- ------- ------- --------
COST AND OTHER EXPENSES:
Cost of restaurant sales 156,322 -- -- 156,322
Depreciation and amortization
expense 10,504 380 -- 10,884
General and administrative
expenses 19,080 199 -- 19,279
Other expenses, net ( 58) 3,541 -- 3,483
-------- ------- ------- --------
Total operating expenses 185,848 4,120 -- 189,968
-------- ------- ------- --------
OPERATING INCOME 3,516 986 -- 4,502
GAIN ON SALE OF ASSETS 548 -- -- 548
INTEREST EXPENSE, net ( 9,638) ( 104) -- ( 9,742)
-------- ------- ------- --------
INCOME (LOSS) BEFORE (PROVISION
FOR) BENEFIT FROM INCOME TAXES ( 5,574) 882 -- ( 4,692)
(PROVISION FOR) BENEFIT FROM
INCOME TAXES 1,694 ( 334) -- 1,360
-------- ------- ------- --------
NET INCOME (LOSS) $( 3,880) $ 548 $ -- $( 3,332)
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the nine months ended October 1, 2000 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
REVENUES:
Restaurant sales $191,896 $ -- $ -- $191,896
Franchise fees 628 -- -- 628
Royalties 3,617 -- -- 3,617
Other revenue -- 5,173 -- 5,173
-------- ------- ------- --------
Total revenues 196,141 5,173 -- 201,314
-------- ------- ------- --------
COST AND OTHER EXPENSES:
Cost of restaurant sales 163,148 -- -- 163,148
Depreciation and amortization
expense 10,165 331 -- 10,496
General and administrative
expenses 19,675 186 -- 19,861
Other expenses, net ( 310) 3,786 -- 3,476
-------- ------- ------- --------
Total operating expenses 192,678 4,303 -- 196,981
-------- ------- ------- --------
OPERATING INCOME 3,463 870 -- 4,333
GAIN ON SALE OF ASSETS 199 -- -- 199
INTEREST EXPENSE, net ( 9,565) ( 41) -- ( 9,606)
-------- ------- ------- --------
INCOME (LOSS) BEFORE (PROVISION
FOR) BENEFIT FROM INCOME TAXES ( 5,903) 829 -- ( 5,074)
(PROVISION FOR) BENEFIT FROM
INCOME TAXES 1,667 ( 316) -- 1,351
-------- ------- ------- --------
NET INCOME (LOSS) $( 4,236) $ 513 $ -- $( 3,723)
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2001 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,880) $ 548 $ -- $( 3,332)
Adjustments to reconcile net
income (loss) to net cash provided by
(used in) operating activities -
Depreciation and amortization 10,504 380 -- 10,884
Change in deferred income taxes ( 120) -- -- ( 120)
Gain on sale of assets ( 548) -- -- ( 548)
Loss on impaired assets 345 -- -- 345
Changes in operating assets and
liabilities:
Receivables, net 3,352 230 (3,442) 140
Inventories 11 ( 8) -- 3
Prepayments and other ( 233) 67 -- ( 166)
Accounts payable ( 6,339) ( 1,290) 3,442 ( 4,187)
Accrued liabilities ( 571) ( 41) -- ( 612)
Other, net 728 1 -- 729
-------- ------- ------- --------
Net cash provided by (used in)
operating activities 3,249 ( 113) -- 3,136
-------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment ( 4,669) ( 132) -- ( 4,801)
Proceeds from the sale of property,
buildings and equipment 2,224 -- -- 2,224
-------- ------- ------- --------
Net cash used in investing
activities ( 2,445) ( 132) -- ( 2,577)
-------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under
revolving credit facility 254 -- -- 254
Repayments of long-term debt ( 5) ( 115) -- ( 120)
Outstanding checks in excess of
bank balance 202 -- -- 202
Principal payments of capital
lease obligations ( 1,486) -- -- ( 1,486)
-------- -------- -------- --------
Net cash used in
financing activities ( 1,035) ( 115) -- ( 1,150)
-------- -------- ------- --------
NET DECREASE IN CASH AND
TEMPORARY INVESTMENTS ( 231) ( 360) -- ( 591)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 4,554 425 -- 4,979
-------- -------- ------- --------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 4,323 $ 65 $ -- $ 4,388
======== ======== ======= ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended October 1, 2000 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- -------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $( 4,236) $ 513 $ -- $( 3,723)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities -
Depreciation and amortization 10,165 331 -- 10,496
Change in deferred income taxes ( 278) -- -- ( 278)
Gain on sale of assets ( 199) -- -- ( 199)
Changes in operating assets and
liabilities:
Receivables, net 1,540 ( 80) ( 1,410) 50
Inventories 231 -- -- 231
Prepayments and other 275 44 -- 319
Accounts payable ( 1,213) ( 255) 1,410 ( 58)
Accrued liabilities ( 1,707) ( 167) -- ( 1,874)
Other, net 616 ( 20) -- 596
-------- -------- ------- -------
Net cash provided by
operating activities 5,194 366 -- 5,560
-------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment (22,742) (1,848) -- (24,590)
Proceeds from the sale property,
buildings and equipment 8,962 -- -- 8,962
-------- ------- ------- -------
Net cash used in investing
activities (13,780) (1,848) -- (15,628)
-------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under
revolving credit facility 13,539 -- -- 13,539
Borrowings of long-term debt -- 2,000 -- 2,000
Repayments of long-term debt ( 5) ( 84) -- ( 89)
Outstanding checks in excess of
bank balance ( 3,568) ( 133) -- ( 3,701)
Principal payments of capital
lease obligations ( 1,313) -- -- ( 1,313)
-------- ------- ------- -------
Net cash provided by
financing activities 8,653 1,783 -- 10,436
-------- ------- ------- -------
NET INCREASE IN CASH AND
TEMPORARY INVESTMENTS 67 301 -- 368
CASH AND TEMPORARY INVESTMENTS,
beginning of period 5,228 74 -- 5,302
-------- ------- ------- -------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 5,295 $ 375 $ -- $ 5,670
======== ======= ======= =======
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:
----------------------------------------------------------------------------
September 30, October 1,
(in thousands) 2001 2000
----------------------------------------------------------------------------
Revenues:
Restaurants $184,311 $191,896
Franchising 5,053 4,245
FBO 5,106 5,173
----------------------------------------------------------------------------
Total segment revenues $194,470 $201,314
============================================================================
Depreciation and Amortization
Restaurants $ 10,426 $ 10,115
Franchising 3 3
FBO 232 197
----------------------------------------------------------------------------
Total segment depreciation and amortization $ 10,661 $ 10,315
============================================================================
Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
Restaurant $ 10,037 $ 10,386
Franchising 3,580 2,932
FBO 1,304 1,138
----------------------------------------------------------------------------
Total segment EBITDA $ 14,921 $ 14,456
============================================================================
September 30, December 31,
2001 2000
-----------------------------------------------------------------------------
Capital Expenditures:
Restaurants $ 4,669 $ 22,463
Franchising - -
FBO 132 1,305
-------------------------------------------------------------------------------
Total segment capital expenditures $ 4,801 $ 23,768
===============================================================================
Total Assets:
Restaurants $185,400 $194,326
Franchising 1,769 1,599
FBO 2,784 3,515
-------------------------------------------------------------------------------
Total segment assets $189,953 $199,440
===============================================================================
A reconciliation of segment depreciation and amortization to consolidated
depreciation and amortization is as follows:
-------------------------------------------------------------------------------
September 30, October 1,
2001 2000
-------------------------------------------------------------------------------
Segment depreciation and amortization $ 10,661 $ 10,315
Unreported segments (1) 223 181
-------------------------------------------------------------------------------
Total consolidated depreciation and amortization $ 10,884 $ 10,496
===============================================================================
A reconciliation of segment EBITDA to
consolidated EBITDA is as follows:
Segment EBITDA $ 14,921 $ 14,456
Unreported segments (1) 465 373
-------------------------------------------------------------------------------
Total consolidated EBITDA $ 15,386 $ 14,829
===============================================================================
A reconciliation of segment total assets to consolidated total assets is as
follows:
-------------------------------------------------------------------------------
September 30, December 31,
2001 2000
-------------------------------------------------------------------------------
Total segment assets $189,953 $199,440
Unreported segments (1) 3,916 3,761
-------------------------------------------------------------------------------
Total consolidated assets $193,869 $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
September 30, 2001 was 6.56%. Availability under the Credit Facility as of
September 30, 2001 was $9.7 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 September 30, 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.
As reported in the Company's Quarterly Report on Form 10-Q for its second
quarter of fiscal 2001, 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 September 30, 2001 was $5.1
million compared to $5.9 million for the three months ended October 1, 2000, a
decrease of 13.4%. 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 Nine
Months Ended Months Ended
-------------------- ---------------------
Sept. 30, Oct. 1, Sept. 30, Oct. 1,
2001 2000 2001 2000
-------- -------- --------- --------
RESTAURANT SALES:
Company owned $ 61,703 $ 63,802 $184,311 $191,896
Franchise 32,473 26,763 91,902 74,245
-------- -------- -------- --------
SYSTEMWIDE RESTAURANT SALES $ 94,176 $ 90,565 $276,213 $266,141
Percent change 3.99% 3.18% 3.78% 2.94%
COMPANY RESTAURANT STATISTICS:
Number of restaurants 247 255 247 255
Restaurant Sales $ 61,703 $ 63,802 $184,311 $191,896
Percent change ( 3.29%) ( 1.75%) ( 3.95%) ( 0.54%)
Percent change in same restaurant sales ( 0.28%) ( 5.10%) ( 1.39%) ( 4.90%)
Selected components are --
Cost of restaurant sales $ 52,085 $ 53,266 $156,322 $163,148
As a percent of restaurant sales 84.42% 83.48% 84.81% 85.02%
Food and paper cost $ 20,243 $ 20,521 $ 60,043 $ 62,101
As a percent of restaurant sales 32.81% 32.16% 32.58% 32.36%
Direct labor $ 13,938 $ 15,078 $ 42,301 $ 46,533
As a percent of restaurant sales 22.59% 23.63% 22.95% 24.25%
Other labor costs $ 4,677 $ 4,835 $ 14,673 $ 15,116
As a percent of restaurant sales 7.58% 7.58% 7.96% 7.89%
FRANCHISE SYSTEM STATISTICS:
Number of restaurants 155 133 155 133
Restaurant Sales $ 32,473 $ 26,763 $ 91,902 $ 74,245
Percent change 21.34% 17.22% 23.78% 13.19%
Percent change in same restaurant sales (1.15%) (5.04%) (2.46%) (2.35%)
Comparison of the Three Months Ended September 30, 2001
--------------------------------------------------------
to the Three Months Ended October 1, 2000
-----------------------------------------
RESULTS OF OPERATIONS
---------------------
Total Krystal systemwide restaurant sales, which included restaurant sales of
$61.7 million for Company-owned and $32.5 million for franchised units, for the
three months ended September 30, 2001 increased 4.0% to $94.2 million compared
to $90.6 million for the same period last year.
Total Company revenues decreased 3.2% to $65.0 million in the three months
ended September 30, 2001 compared to $67.2 million in the same period last
year. The $2.2 million decrease was comprised of a $2.1 million decrease in
restaurant sales, a $182,000 decrease in revenue from the Company's aviation
subsidiary, offset by a $110,000 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 September 30, 2001 compared to
255 restaurants at October 1, 2000. The eight store decrease in Company
operated units resulted from the Company's sale (re-franchising) of three
restaurants, which were sold in connection with the execution of new restaurant
development commitments by franchisees, and the closure of five under-
performing units.
Company-owned same restaurant sales decreased 0.28%, compared to the same
period in 2000. The decrease was attributable in part to softer economic
conditions, which adversely affected customer traffic in the Company's
restaurants, particularly during the week of September 11, 2001. Management
estimates the lost sales during the week of September 11, 2001 had the effect
of reducing same restaurant sales for the current quarter by approximately
0.35%. The average customer check for Company-owned restaurants increased
1.5% to $4.65 for the three months ended September 30, 2001, compared to $4.58
for the same period in 2000. This increase resulted primarily from price
increases implemented by the Company in October of 2000.
Franchise fee income was $173,000 in the three months ended September 30, 2001
compared to $303,000 in the three months ended October 1, 2000. Royalty
revenue increased 18.4% to $1.5 million in the three months ended
September 30, 2001 from $1.3 million in the three months ended October 1, 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 September 30, 2001, franchisees opened five new restaurants, and
re-opened four additional restaurants that had been temporarily closed. There
were no franchise fees associated with the re-opened restaurants. During the
three months ended October 1, 2000, franchisees opened 11 new franchise
restaurants. The increase in franchise royalties was due to a 21.33% increase
in franchise system sales compared to the same period in 2000 resulting
primarily from a 16.54% increase in the number of franchisee operated
restaurants. The franchise system operated 155 restaurants at
September 30, 2001 compared to 133 at October 1, 2000.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, was $1.6 million for the three months ended September 30, 2001 and
$1.8 million for the three months ended October 1, 2000, a 10.2% decrease.
This decrease resulted primarily from a decrease of 14.2% in jet fuel sales
volume for the three months ended September 30, 2001 compared to the same
period in 2000.
Cost of restaurant sales was $52.1 million for the three months ended
September 30, 2001 compared to $53.3 million for the three months ended
October 1, 2000. Food and paper costs as a percent of restaurant sales
increased to 32.8% in the three months ended September 30, 2001 from 32.2% in
the three months ended October 1, 2000. The increase in food and paper costs
as a percent of restaurant sales resulted primarily from an increase in
beef, cheese and other commodity pricing, partially offset by improved cost
controls. Direct labor as a percent of restaurant sales was 22.6% during the
three months ended September 30, 2001, compared to 23.6% in the same period in
2000. Average wage increased 1.3% to $6.33 during the three months ended
September 30, 2001, compared to $6.25 in the same period in 2000. This
increase was more than offset by an increase in labor efficiency resulting
from improvements in the utilization of the Company's store level labor
management systems.
Depreciation and amortization expenses increased $69,000, or 1.9%, to $3.6
million in the three months ended September 30, 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 $295,000, or 4.3%, to $6.5
million in the three months ended September 30, 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 increased $90,000, or 7.5%, to $1.3 million in the three
months ended September 30, 2001 versus the same period last year. This
increase resulted primarily from a write-off of $345,000 for impaired assets
during the three months ending September 30, 2001 and partially offset by a
decrease in the wholesale cost and volume of jet fuel purchased by the
Company's aviation subsidiary in the three months ended September 30, 2001
compared to the same period in 2000.
The Company reported a loss on sale of assets of $48,000 for the three months
ended September 30, 2001 compared to a $199,000 gain for the three months ended
October 1, 2000. The loss and gain resulted from the sale of restaurants to
franchisees and the sale of other non-operating properties.
Interest expense, net of interest income, decreased $102,000 to $3.2 million in
the three months ended September 30, 2001 from $3.3 million in the three months
ended October 1, 2000. This decrease primarily resulted from a decrease in
interest rates on borrowings under the Company's Credit Facility as well as
a $3.9 million decrease in long-term debt.
The Company's provision for income taxes decreased $415,000, to a $527,000 tax
benefit in the three months ended September 30, 2001 from a $112,000 tax
benefit in the three months ended October 1, 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 Nine Months Ended September 30, 2001
------------------------------------------------------
to the Nine Months Ended October 1, 2000
----------------------------------------
RESULTS OF OPERATIONS
---------------------
Total Krystal systemwide restaurant sales, which included restaurant sales of
$184.3 million for Company-owned and $91.9 million for franchised units, for
the nine months ended September 30, 2001 increased 3.8% to $276.2 million
compared to $266.1 million for the same period last year.
Total Company revenues decreased 3.4% to $194.5 million in the nine months
ended September 30, 2001 compared to $201.3 million in the same period of
2000. The $6.8 million decrease was comprised of a $7.6 million decrease in
restaurant sales, a $67,000 decrease in other revenue from the Company's
aviation subsidiary, offset by a $808,000 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 September 30, 2001 compared
to 255 restaurants at October 1, 2000. The eight store decrease in Company
operated units resulted from the Company's sale (re-franchising) of three
restaurants, which were sold in connection with the execution of new restaurant
development commitments by franchisees, and the closure of five under-
performing units.
Company-owned same restaurant sales decreased 1.39%, compared to the same
period in 2000. The decrease was attributable in part to softer economic
conditions, which adversely affected customer traffic in the Company's
restaurants. The average customer check for Company-owned restaurants
increased 2.7% to $4.64 for the nine months ended September 30, 2001,
compared to $4.52 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 $676,000 in the nine months ended September 30, 2001
compared to $628,000 in the nine months ended October 1, 2000. Royalty revenue
increased 21.0% to $4.4 million in the nine months ended September 30, 2001
from $3.6 million in the nine months ended October 1, 2000. The increase in
franchise fees, which are earned upon the opening of new restaurants, resulted
primarily from an increase in the number of new franchise restaurants opened
compared to the same period in 2000. During the nine months ended
September 30, 2001, franchisees opened 20 new restaurants, and re-opened seven
additional restaurants that had been temporarily closed. There were no
franchise fees associated with the re-opened restaurants. During the nine
months ended October 1, 2000, franchisees opened 21 franchise restaurants which
included four units that were transferred among franchisees. The increase in
franchise royalties was due to a 23.8% 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 155
restaurants at September 30, 2001 compared to 133 at October 1, 2000.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, was $5.1 million for the nine months ended September 30, 2001
compared to $5.2 million for the nine months ended October 1, 2000, a 1.3%
decrease. This decrease in revenue resulted primarily from a 8.8% decrease
in jet fuel volume and was partially offset by an increase in retail jet fuel
prices during the nine months ended September 30, 2001 compared to the nine
months ended October 1, 2000.
Cost of restaurant sales was $156.3 million for the nine months ended
September 30, 2001 compared to $163.1 million for the nine months ended
October 1, 2000. Food and paper costs as a percent of restaurant sales was
32.6% in the nine months ended September 30, 2001 compared to 32.4% in the nine
months ended October 1, 2000. The increase in food and paper costs as a
percent of restaurant sales resulted from an increase in beef, cheese and
other commodity pricing, partially offset by improved cost controls. Direct
labor as a percent of restaurant sales was 23.0% during the nine months ended
September 30, 2001, compared to 24.3% in the same period in 2000. Average wage
increased 1.4% to $6.34 during the nine months ended September 30, 2001,
compared to $6.25 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 $388,000, or 3.7%, to $10.9
million in the nine months ended September 30, 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 $582,000, or 2.9%, to $19.3
million in the nine months ended September 30, 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 were $3.5 million in the nine months ended September 30, 2001
and October 1, 2000.
The Company reported a gain on sale of assets of $548,000 for the nine months
ended September 30, 2001 compared to $199,000 for the nine months ended
October 1, 2000. The gain resulted from the sale of restaurants to franchisees
and the sale of other non-operating properties.
Interest expense, net of interest income increased $136,000 to $9.7 million in
the nine months ended September 30, 2001 from $9.6 million in the nine months
ended October 1, 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 $3.9 million decrease in long-term debt.
The Company's provision for income taxes had a $1.4 million tax benefit in the
nine months ended September 30, 2001 and October 1, 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 $18.0 million at September 30, 2001, compared to a
working capital deficit of $21.7 million at December 31, 2000.
Capital expenditures totaled approximately $4.8 million in the nine months
ended September 30, 2001 as compared to $24.6 million in the nine months ended
October 1, 2000. The Company opened no new restaurants during the nine
months ended September 30, 2001 compared to 12 opened during the nine months
ended October 1, 2000. Management estimates that capital expenditures will be
approximately $1.3 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.
At September 30, 2001, the Company had available cash of approximately $4.4
million, receivables of $1.8 million, and $9.7 million available under the
Company's line of credit. In the opinion of management, these funds and funds
from operations will be sufficient to meet operating requirements, anticipated
capital expenditures and other obligations for the foreseeable future.
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.
As reported in the Company's Quarterly Report on Form 10-Q for its second
quarter of fiscal 2001, 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 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 third 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: 11/1/01 /s/Larry D. Bentley
--------------- ------------------------
Larry D. Bentley
(Vice President, Chief Financial Officer
and Principal Accounting Officer)
1
28