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 March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from to
--------- --------
Commission file number 0-20040
---------------------------------
THE KRYSTAL COMPANY
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TENNESSEE 62-0264140
--------- ----------
(State or other jurisdiction of (IRS Employer identification
incorporation or organization) Number)
One Union Square, Chattanooga, TN 37402
- -----------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(423) 757-1550
- -----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
---- ----
This report is filed by the Company pursuant to Section 15(d) of the
Securities Exchange Act of 1934. The Company has 100 shares of common
stock outstanding held of record by Port Royal Holdings, Inc. as of
May 10, 2002.
THE KRYSTAL COMPANY
-------------------
March 31, 2002
--------------
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 March 31, 2002 and December 30, 2001, and (2) their change in
shareholder's equity for the three months ending March 31, 2002 and (3) the
results of their operations and their cash flows for the three months ended
March 31, 2002 and April 1, 2001 have been included. The results of operations
for the interim period ended March 31, 2002 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 operational requirements and capital expenditures
and the impact of governmental regulations. The Company cautions that such
factors are not exclusive. Caution should be taken not to place undue reliance
on any such forward-looking statements since such statements speak only as of
the date of the making of such statements and are based on certain expectations
and estimates of the Company which are subject to risks and changes in
circumstances that are not within the Company's control. The Company does
not undertake to update forward-looking statements other than as required by
law. The information provided herein should be read in conjunction with
information provided in the Company's Form 10-K for the fiscal year ended
December 30, 2001.
PART I. FINANCIAL INFORMATION
-----------------------------
Item I. Financial Statements
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands) (Unaudited)
March 31, December 30,
2002 2001
--------- ----------
ASSETS
- ------
CURRENT ASSETS:
Cash and temporary investments $ 13,721 $ 13,042
Receivables, net 1,516 1,418
Inventories 1,746 2,033
Deferred income taxes 2,877 2,877
Prepayments and other 940 823
-------- --------
Total current assets 20,800 20,193
-------- --------
PROPERTY, BUILDINGS, AND EQUIPMENT, net 94,457 114,800
-------- --------
LEASED PROPERTIES, net 8,598 9,144
-------- --------
OTHER ASSETS:
Goodwill, net 40,759 40,759
Prepaid pension asset 8,491 8,754
Deferred financing costs, net 2,585 2,735
Other 1,101 1,605
-------- --------
Total other assets 52,936 53,853
-------- --------
TOTAL ASSETS $176,791 $197,990
======== ========
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
(In thousands) (Unaudited)
March 31, December 30,
2002 2001
LIABILITIES AND SHAREHOLDER'S EQUITY ----------- ----------
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 4,405 $ 5,175
Accrued liabilities 27,099 22,719
Current portion of long-term debt 1,476 1,361
Current portion of capital
lease obligations 2,164 2,133
-------- --------
Total current liabilities 35,144 31,388
-------- --------
LONG-TERM DEBT, excluding current portion 88,212 118,581
-------- --------
CAPITAL LEASE OBLIGATIONS, excluding
current portion 7,617 8,170
-------- --------
DEFERRED INCOME TAXES 7,354 8,912
-------- --------
OTHER LONG-TERM LIABILITIES 5,500 1,501
-------- --------
SHAREHOLDER'S EQUITY:
Common stock, without par value;
100 shares authorized; issued
and outstanding, at March 31, 2002,
and at December 30, 2001 35,000 35,000
Accumulated deficit ( 2,036) ( 5,562)
-------- --------
Total shareholder's equity 32,964 29,438
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $176,791 $197,990
======== ========
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands) (Unaudited)
For the three Months ended
--------------------------
March 31, April 1,
2002 2001
------- --------
REVENUES:
Restaurant sales $ 60,996 $ 59,298
Franchise fees 295 358
Royalties 1,584 1,351
Other revenue 1,627 1,717
------- -------
64,502 62,724
------- -------
COST AND OTHER EXPENSES:
Cost of restaurant sales 49,958 50,636
Advertising expense 2,562 2,491
Depreciation and amortization
expenses 2,775 3,643
General and administrative
expenses 4,389 4,377
Other expenses, net 1,010 1,099
------- -------
60,694 62,246
------- -------
OPERATING INCOME 3,808 478
GAIN ON SALE OF ASSETS -- 30
INTEREST EXPENSE, net ( 2,491) ( 3,305)
------- -------
INCOME (LOSS) BEFORE (PROVISION FOR) BENEFIT
FROM INCOME TAXES AND EXTRAORDINARY ITEM 1,317 ( 2,797)
(PROVISION FOR) BENEFIT FROM INCOME TAXES ( 501) 872
------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 816 ( 1,925)
EXTRAORDINARY ITEM:
Gain on early retirement of debt, net
of applicable income tax expense of
$1,661 in 2002 2,710 --
------- -------
Net income (loss) $ 3,526 $( 1,925)
======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
-----------------------------------------------
FOR THE THREE MONTHS ENDED
-------------------------
March 31, 2002
--------------
(In thousands)
(Unaudited)
Common Accumulated
Stock Deficit
-------- --------
BALANCE, December 30, 2001 $35,000 $( 5,562)
Net income -- 3,526
------- -------
BALANCE, March 31, 2002 $35,000 $( 2,036)
======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(Unaudited)
For The Three Months Ended
----------------------------
March 31, April 1,
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 3,526 $ (1,925)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities-
Depreciation and amortization 2,775 3,643
Change in deferred taxes ( 1,558) ( 42)
Gain on early retirement of debt ( 4,371) --
Gain on sale of assets -- ( 30)
Changes in operating assets and liabilities:
Receivables, net ( 98) 83
Inventories 287 ( 81)
Prepayments and other ( 117) ( 40)
Accounts payable ( 770) 32
Accrued liabilities 4,380 ( 678)
Other, net 4,315 772
-------- --------
Net cash provided by
operating activities 8,369 1,734
-------- --------
INVESTING ACTIVITIES:
Additions to property, buildings,
and equipment ( 1,198) ( 1,286)
Proceeds from sale of property,
buildings, and equipment 24,284 539
-------- --------
Net cash provided by (used in)
investing activities 23,086 ( 747)
-------- --------
FINANCING ACTIVITIES:
Net borrowings under revolving
credit facility ( 3,104) 1,000
Repayments of long-term debt (27,150) ( 38)
Outstanding checks in excess of
bank balance -- ( 1,666)
Principal payments of
capital lease obligations ( 522) ( 485)
-------- --------
Net cash used in
financing activities (30,776) ( 1,189)
-------- --------
NET (DECREASE) INCREASE IN CASH AND
TEMPORARY INVESTMENTS 679 ( 202)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 13,042 4,979
-------- --------
CASH AND TEMPORARY INVESTMENTS,
end of period $13,721 $ 4,777
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 1,299 $ 635
======= =======
Income taxes $ 23 $ 21
======= =======
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 --
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 --
Property, buildings and equipment are stated at cost. 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
when events or changes in circumstances warrant such a review. When an asset
is determined to be impaired, its carrying value is reduced and a charge is
recognized in the Consolidated Statement of Operations.
Leased property --
The lower of fair market value or the discounted value of that portion of a
capital lease attributable to building costs is capitalized and amortized by
the straight-line method over the term of such leases and included with
depreciation expense. The portions of such leases relating to land are
accounted for as operation leases.
Intangibles --
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 are
effective for fiscal years beginning after December 15, 2001. SFAS No. 141
requires companies to recognize acquired identifiable intangible assets
separately from goodwill if certain conditions are met. The Standards
require the value of separately identifiable intangible assets to be measured
at fair value. SFAS No. 142 requires 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 is required to reduce goodwill through a charge to
earnings. The Company adopted the Standards effective December 31, 2001.
The adoption of the Standards has the effect of eliminating the amortization
of goodwill. In fiscal 2001, the Company recorded amortization expense related
to goodwill of approximately $1,967,500. Based on an independent valuation
of the Company as of December 31, 2001, the Company has determined there is no
impairment of its goodwill asset as of that date.
The consolidated balance sheet includes the allocation of purchase accounting
goodwill of $49,190,000 (net of amounts written off in connection with the
subsequent sale of certain assets) and deferred financing costs of $5,777,000
at March 31, 2002. Deferred financing costs are amortized over the life of the
debt agreement. The financing costs related to the Senior Notes are amortized
over 10 years. The financing costs associated with the Company's Credit
Facility are being amortized in part through May 2004 and in part through
January 2007. In accordance with the provisions of the Standards, goodwill
amortization was ceased effective December 31, 2001. Amortization expense for
deferred financing costs for the three months ended March 31, 2002 was $202,300
and for the three months ended April 1, 2001 was $135,900. Amortization
expense for goodwill for the three months ended April 1, 2001 was $491,900.
Accumulated amortization of goodwill at March 31, 2002 and April 1, 2001 was
$8,431,000 and $6,955,200, respectively. Accumulated amortization of deferred
financing costs at March 31, 2002 and April 1, 2001 was $3,192,700 and
$2,371,200, respectively.
Franchise and License Agreements --
Franchise or license agreements are available for single and multi-unit
restaurants. The multi-unit agreement establishes the number of restaurants
the franchisee or licensee is to construct and open in the franchised area
during the term of the agreement. At March 31, 2002, there were 169
franchised or licensed restaurants and at April 1, 2001, there were 142
franchised or licensed restaurants.
Franchisees and licensees are required to pay the Company an initial franchise
or license fee plus a weekly royalty and service fee of either 4.5% or 6.0%
of the restaurants' gross receipts, depending on the duration of the
franchise agreement. The initial franchise and license fees are recorded as
income as related restaurants begin operations. Royalty and service fees,
which are based on restaurant sales of franchisees and licensees, are
recognized as earned. Franchise fees received prior to the opening of the
restaurant are deferred and included in accrued liabilities on the consolidated
balance sheets. At March 31, 2002 and April 1, 2001, total deferred franchise
and license fees were approximately $1,002,500 and $837,500, respectively.
Fair Market Value of Financial Instruments --
Unless otherwise indicated elsewhere in the notes to the consolidated financial
statements, the carrying values of the Company's financial instruments
approximate their fair values.
Benefit Plans --
The determination of obligations and expenses under the Company's retirement
and post retirement benefit plans is dependent on the selection of certain
assumptions used by actuaries in calculating such amounts. In accordance
with generally accepted accounting principles, actual results that differ
from assumptions are accumulated and amortized over future periods and
therefore, generally affect our recognized expense and the recorded
obligation in such periods. Significant differences in actual experience or
significant changes in the assumptions used may materially affect the pension
and post retirement obligations and future expenses.
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 2002 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 March 31, 2002 and December 30, 2001 and the
three months ended March 31, 2002 and April 1, 2001. The equity method
has been used by the Company with respect to investments in subsidiaries.
CONDENSED CONSOLIDATING BALANCE SHEET
At March 31, 2002
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
----------- ---------- ----------- -----------
Current Assets:
Cash and temporary investments $ 13,430 $ 291 $ -- $ 13,721
Receivables, net (13,171) 343 14,344 1,516
Inventories 1,690 56 -- 1,746
Deferred income taxes 2,876 1 -- 2,877
Prepayments and other 886 54 -- 940
-------- ------- ------- --------
Total current assets 5,711 745 14,344 20,800
-------- ------- ------- --------
Property, Buildings, and Equipment 123,331 5,717 -- 129,048
Accumulated depreciation (33,214) (1,377) -- (34,591)
-------- ------- ------- --------
Net property, buildings, and equipment 90,117 4,340 -- 94,457
-------- ------- ------- --------
Leased Properties, net 8,598 -- -- 8,598
-------- ------- ------- --------
Investment in Subsidiary 1 1 (2) --
Other Assets:
Goodwill, net 40,759 -- -- 40,759
Prepaid pension asset 8,491 -- -- 8,491
Deferred financing costs, net 2,585 -- -- 2,585
Other 1,084 17 1,101
-------- ------- ------- --------
Total other assets 52,919 17 -- 52,936
-------- ------- ------- --------
Total Assets $157,346 $ 5,103 $14,342 $176,791
======== ======= ======= ========
Current Liabilities:
Accounts payable $ (9,052) $( 887) $14,344 $ 4,405
Accrued liabilities 26,705 394 -- 27,099
Current portion of long-term debt 1,250 226 -- 1,476
Current portion of capital lease
obligations 2,164 -- -- 2,164
-------- ------- ------- --------
Total current liabilities 21,067 ( 267) 14,344 35,144
-------- ------- ------- --------
Long Term Debt, excluding current
portion 86,646 1,566 -- 88,212
-------- ------- ------- --------
Capital Lease Obligations, excluding
current portion 7,617 -- -- 7,617
-------- ------- ------- --------
Deferred Income Taxes 7,370 ( 16) 7,354
-------- ------- ------- --------
Other Long-Term Liabilities 5,500 -- -- 5,500
-------- ------- ------- --------
Shareholder's Equity:
Common Stock 35,000 2 (2) 35,000
Retained Earnings (5,854) 3,818 -- (2,036)
-------- ------- ------- --------
Total shareholder's equity 29,146 3,820 (2) 32,964
-------- ------- ------- --------
Total Liabilities and Shareholder's
Equity $157,346 $ 5,103 $14,342 $176,791
======== ======= ======= ========
CONDENSED CONSOLIDATING BALANCE SHEET
At December 30, 2001
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
---------- ---------- ----------- -----------
Current Assets:
Cash and temporary investments $ 12,965 $ 77 $ -- $ 13,042
Receivables, net (11,734) 234 12,918 1,418
Inventories 1,971 62 -- 2,033
Deferred income taxes 2,876 1 -- 2,877
Prepayments and other 756 67 - 823
-------- ------- ------- --------
Total current assets 6,834 441 12,918 20,193
-------- ------- ------- --------
Property, Buildings, and Equipment 144,654 5,716 -- 150,370
Accumulated depreciation (34,289) (1,281) -- (35,570)
-------- ------- ------- --------
Net property, buildings, and equipment 110,365 4,435 -- 114,800
-------- ------- ------- --------
Leased Properties, net 9,144 -- -- 9,144
-------- ------- ------- --------
Investment in Subsidiary 1 1 (2) -
-------- ------- ------- --------
Other Assets:
Goodwill, net 40,759 -- -- 40,759
Prepaid pension asset 8,754 -- -- 8,754
Deferred financing costs, net 2,735 -- -- 2,735
Other 1,588 17 -- 1,605
-------- ------- ------- --------
Total other assets 53,836 17 -- 53,853
-------- ------- ------- --------
Total assets $180,180 $ 4,894 $12,916 $197,990
======== ======= ======= ========
Current Liabilities:
Accounts payable $( 6,795) $( 948) $12,918 $ 5,175
Accrued liabilities 22,339 380 -- 22,719
Current portion of long-term debt 1,138 223 -- 1,361
Current portion of capital lease
obligations 2,133 -- -- 2,133
-------- ------- ------- --------
Total current liabilities 18,815 ( 345) 12,918 31,388
-------- ------- ------- --------
Long Term Debt, excluding current
portion 116,957 1,624 -- 118,581
-------- ------- ------- --------
Capital Lease Obligations, excluding
current portion 8,170 -- -- 8,170
-------- ------- ------- --------
Deferred Income Taxes 8,928 ( 16) - 8,912
-------- ------- ------- --------
Other Long-Term Liabilities 1,501 -- -- 1,501
-------- ------- ------- --------
Shareholder's Equity:
Common Stock 35,000 2 (2) 35,000
Retained Earnings ( 9,191) 3,629 -- ( 5,562)
-------- ------- ------- --------
Total shareholder's equity 25,809 3,631 (2) 29,438
-------- ------- ------- --------
Total Liabilities and Shareholder's
Equity $180,180 $ 4,894 $12,916 $197,990
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the three months ended March 31, 2002
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
Revenues:
Restaurant Sales $ 60,996 $ -- $ -- $ 60,996
Franchise fees 295 -- -- 295
Royalties 1,584 -- -- 1,584
Other - 1,627 -- 1,627
-------- ------- ------- --------
Total Revenues 62,875 1,627 -- 64,502
-------- ------- ------- --------
Cost and Expenses:
Cost of restaurant sales 49,958 -- -- 49,958
Advertising expense 2,562 -- -- 2,562
Depreciation and amortization
expense 2,679 96 -- 2,775
General and administrative
expenses 4,312 77 -- 4,389
Other expenses, net (120) 1,130 -- 1,010
-------- ------- ------- --------
59,391 1,303 -- 60,694
-------- ------- ------- --------
Operating Income 3,484 324 -- 3,808
Interest expense, net ( 2,471) (20) -- ( 2,491)
-------- ------- ------- --------
Income before provision for income
taxes and extraordinary item 1,013 304 -- 1,317
Provision for income taxes ( 386) (115) ( 501)
-------- -------- ------- --------
Income before extraordinary item 627 189 -- 816
Extraordinary item:
Gain on early retirement of debt, net
of applicable income tax expense
of $1,661 in 2002 2,710 -- -- 2,710
-------- ------- ------- --------
Net income $ 3,337 $ 189 $ -- $ 3,526
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the three months ended April 1, 2001
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
Revenues:
Restaurant Sales $ 59,298 $ -- $ -- $ 59,298
Franchise fees 358 -- 358
Royalties 1,351 -- 1,351
Other - 1,717 -- 1,717
-------- ------- ------- --------
Total Revenues 61,007 1,717 -- 62,724
-------- ------- ------- --------
Cost and Expenses:
Cost of restaurant sales 50,636 -- -- 50,636
Advertising expense 2,491 -- -- 2,491
Depreciation and amortization
expense 3,514 129 -- 3,643
General and administrative
expenses 4,314 63 -- 4,377
Other expenses, net ( 125) 1,224 -- 1,099
-------- ------- ------- --------
60,830 1,416 -- 62,246
-------- ------- ------- --------
Operating Income 177 301 -- 478
Gain on sale of assets 30 -- -- 30
Interest expense, net ( 3,270) (35) -- ( 3,305)
-------- ------- ------- --------
Income (loss) before (provision
for) benefit from income taxes ( 3,063) 266 -- ( 2,797)
(Provision for) benefit from
income taxes 968 ( 96) -- 872
-------- ------- ------- --------
Net income (loss) $( 2,095) $ 170 $ -- $( 1,925)
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended March 31, 2002
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,337 $ 189 $ -- $ 3,526
Adjustments to reconcile net
income to net cash provided
by operating activities -
Depreciation and amortization 2,679 96 -- 2,775
Deferred income taxes ( 1,558) -- -- ( 1,558)
Gain on early retirement of debt ( 4,371) -- -- ( 4,371)
Changes in operating assets and
liabilities:
Receivables, net 11 ( 109) -- ( 98)
Inventories 281 6 -- 287
Prepayments and other ( 130) 13 -- ( 117)
Accounts payable ( 831) 61 -- ( 770)
Accrued liabilities 4,366 14 -- 4,380
Other, net 4,315 -- -- 4,315
-------- ------- ------- --------
Net cash provided by
operating activities 8,099 270 -- 8,369
-------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment ( 1,185) ( 13) -- ( 1,198)
Proceeds from the sale and the
sale/leaseback of property,
buildings and equipment 24,272 12 -- 24,284
-------- ------- ------- --------
Net cash provided by (used in)
investing activities 23,087 ( 1) -- 23,086
-------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under
revolving credit facility ( 3,104) -- -- ( 3,104)
Repayments of long-term debt (27,095) ( 55) -- (27,150)
Principal payments of capital
lease obligations ( 522) -- -- ( 522)
-------- -------- -------- --------
Net cash used in financing
activities (30,721) ( 55) -- (30,776)
-------- -------- ------- --------
NET INCREASE IN CASH AND
TEMPORARY INVESTMENTS 465 214 -- 679
CASH AND TEMPORARY INVESTMENTS,
beginning of period 12,965 77 -- 13,042
-------- -------- ------- --------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 13,430 $ 291 $ -- $ 13,721
======== ======== ======= ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended April 1, 2001
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,095) $ 170 $ -- $ (1,925)
Adjustments to reconcile net income
(loss) to net cash provided
by (used in) operating activities -
Depreciation and amortization 3,514 129 -- 3,643
Deferred income taxes ( 42) -- -- ( 42)
Gain on sale of asset ( 30) -- -- ( 30)
Changes in operating assets and
liabilities:
Receivables, net ( 82) 165 -- 83
Inventories ( 71) ( 10) -- ( 81)
Prepayments and other ( 60) 20 -- ( 40)
Accounts payable 818 ( 786) -- 32
Accrued liabilities ( 605) ( 73) -- ( 678)
Other, net 771 1 -- 772
-------- ------- ------- --------
Net cash provided by (used in)
operating activities 2,118 ( 384) -- 1,734
-------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment ( 1,193) ( 93) -- (1,286)
Proceeds from the sale and the
sale/leaseback of property,
buildings and equipment 539 -- -- 539
-------- ------- ------- --------
Net cash used in investing
activities ( 654) ( 93) -- ( 747)
-------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under
revolving credit facility 1,000 -- -- 1,000
Repayments of long-term debt ( 5) ( 33) -- ( 38)
Outstanding checks in excess of
bank balance ( 1,751) 85 -- (1,666)
Principal payments of capital
lease obligations ( 485) -- -- ( 485)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities ( 1,241) 52 -- (1,189)
-------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS 223 ( 425) -- ( 202)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 4,554 425 -- 4,979
-------- -------- ------- --------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 4,777 $ -- $ -- $ 4,777
======== ======== ======= ========
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:
- ----------------------------------------------------------------------------
March 31, April 1,
(in thousands) 2002 2001
- ----------------------------------------------------------------------------
Revenues:
Restaurants $ 60,996 $ 59,298
Franchising 1,879 1,709
FBO 1,627 1,717
- ----------------------------------------------------------------------------
Total segment revenues $ 64,502 $ 62,724
============================================================================
Depreciation and Amortization
Restaurants $ 2,652 $ 3,489
Franchising 1 1
FBO 47 79
- ----------------------------------------------------------------------------
Total segment depreciation and amortization $ 2,700 $ 3,569
============================================================================
Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
Restaurant $ 4,675 $ 2,336
Franchising 1,368 1,260
FBO 395 408
- ----------------------------------------------------------------------------
Total segment EBITDA $ 6,438 $ 4,004
============================================================================
March 31, December 30,
2002 2001
- -----------------------------------------------------------------------------
Capital Expenditures:
Restaurants $ 1,183 $ 5,665
Franchising 0 0
FBO 13 166
- -------------------------------------------------------------------------------
Total segment capital expenditures $ 1,196 $ 5,831
===============================================================================
Total Assets:
Restaurants $168,398 $189,695
Franchising 1,635 1,718
FBO 2,986 2,722
- -------------------------------------------------------------------------------
Total segment assets $173,019 $194,135
===============================================================================
A reconciliation of segment depreciation and amortization to consolidated
depreciation and amortization is as follows:
- -------------------------------------------------------------------------------
March 31, April 1,
2002 2001
- -------------------------------------------------------------------------------
Segment depreciation and amortization $ 2,700 $ 3,569
Unreported segments (1) 75 74
- -------------------------------------------------------------------------------
Total consolidated depreciation and amortization $ 2,775 $ 3,643
===============================================================================
A reconciliation of segment EBITDA to
consolidated EBITDA is as follows:
Segment EBITDA $ 6,438 $ 4,004
Unreported segments (1) 145 147
- -------------------------------------------------------------------------------
Total consolidated EBITDA $ 6,583 $ 4,151
===============================================================================
A reconciliation of segment total assets to consolidated total assets is as
follows:
- -------------------------------------------------------------------------------
March 31, December 30,
2002 2001
- -------------------------------------------------------------------------------
Total segment assets $173,019 $194,135
Unreported segments (1) 3,772 3,855
- -------------------------------------------------------------------------------
Total consolidated assets $176,791 $197,990
===============================================================================
(1) Unreported segments do not meet the quantitative thresholds for segment
reporting.
4. INDEBTEDNESS
Senior Secured Credit Agreement--
0n January 28, 2002, the Company entered into a $25.0 million credit agreement
(the "Credit Facility"). The Credit Facility provides for $10,000,000 in
revolving loan commitments and a $15,000,000 term loan commitment, with
maturity dates of June 1, 2004 and January 28, 2007, respectively.
Borrowings under the revolving loan commitment bear interest rates, at the
option of the Company, and depending on the certain financial covenants,
equal to either (a) the greater of the prime rate, or the federal
funds rate plus 0.5%, plus a margin (which ranges from 0.25% to 2.0%) or
(b) the rate offered in the Eurodollar market for amounts and periods
comparable to the relevant loan, plus a margin (which ranges from 1.75%
to 3.5% and is determined by certain financial covenants).
Borrowings under the term loan commitment bear interest rates equal to the rate
offered in the Eurodollar market for 30 day borrowings, plus an applicable
margin (which ranges from 3.5% to 4.0% and is determined by certain
financial covenants).
The Credit Facility contains restrictive covenants including, but not
limited to (a) the Company's required maintenance of a minimum amount of
tangible net worth; (b) the Company's required maintenance of certain levels
of funded debt coverage; (c) limitations regarding additional indebtedness;
(d) the Company's required maintenance of a minimum amount of fixed charges
coverage; (e) limitations regarding consolidated capital expenditures and
(f) limitations regarding liens on assets.
Essentially all assets of the Company are pledged as collateral on the
Credit Facility. Additionally, the Credit Facility is guaranteed by Port
Royal through a secured pledge of all of the Company's common stock held by
Port Royal and the common stock of each existing and future subsidiary of the
Company.
Senior Notes--
In September 1997, the Company issued $100,000,000 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
by Port Royal.
On December 31, 2001, the Company purchased $27.0 million aggregate principal
amount of its Notes through a tender offer. These Notes were retired
resulting in an extraordinary gain of $2.7 million. The extraordinary gain
resulted from retirement discounts of $5.4 million, offset by fees, taxes and
other costs of approximately $2.7 million.
5. SALE AND LEASEBACK TRANSACTION
On December 31, 2001, the Company entered into a real estate sale and
leaseback transaction in which it sold commercial real property and
improvements of 32 restaurant locations to an unaffiliated third party
and leased the properties back for a period of twenty years. Proceeds from
this transaction were approximately $23,317,000, net of expenses of $950,000.
The Company has the option to extend the leases past the original twenty years
for four additional periods of five years each. The leases are accounted for
as operating leases. The net proceeds of this transaction were used to
repurchase the Notes in the tender offer on December 31, 2001.
The gain that the Company realized on the above real estate transactions was
approximately $4,101,000 and has been deferred and classified in the balance
sheets as a deferred gain, and will be amortized as a reduction of rental
expense over the life of the leases.
6. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal proceedings incidental to its
business. The ultimate disposition of these matters is not presently
determinable but will not, in the opinion of management and the Company's
legal counsel, have a material adverse effect on the Company's financial
condition or results of operations.
Item 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 March 31, 2002 was $6.6
million compared to $4.1 million for the three months ended April 1, 2001, an
increase of 61.0%. This increase in cash operating profit was primarily
attributable to an increase in total revenues and a decrease in cost of
labor and food as a percent of restaurant sales.
The following table reflects certain key operating statistics which impact the
Company's financial results:
KEY OPERATING STATISTICS
(Dollars in thousands)
For the Three Months Ended
----------------------------
March 31, April 1
2002 2001
-------- --------
RESTAURANT SALES:
Company owned $ 60,996 $ 59,298
Franchise 33,828 28,166
-------- --------
SYSTEMWIDE RESTAURANT SALES $ 94,824 $ 87,464
Percent change 8.41% 4.72%
COMPANY RESTAURANT STATISTICS:
Number of restaurants 246 250
Restaurant Sales $ 60,996 $ 59,298
Percent change 2.86% ( 3.82%)
Percent change in same restaurant sales 4.21% (2.55%)
Selected components are --
Cost of restaurant sales $ 49,958 $ 50,636
As a percent of restaurant sales 81.90% 85.39%
Food and paper cost $ 18,670 $ 18,847
As a percent of restaurant sales 30.61% 31.78%
Direct labor $ 13,316 $ 14,018
As a percent of restaurant sales 21.83% 23.64%
Other labor costs $ 4,687 $ 5,069
As a percent of restaurant sales 7.68% 8.55%
FRANCHISE SYSTEM STATISTICS:
Number of restaurants 169 142
Restaurant Sales $ 33,828 $ 28,166
Percent change 20.10% 28.80%
Percent change in same restaurant sales 0.59% (2.78%)
Comparison of the Three Months Ended March 31, 2002
---------------------------------------------------
to the Three Months Ended April 1, 2001
---------------------------------------
RESULTS OF OPERATIONS
---------------------
Total Krystal systemwide restaurant sales, which included restaurant sales of
$61.0 million for Company-owned and $33.8 million for franchised units, for the
three months ended March 31, 2002 increased 8.4% to $94.8 million compared to
$87.5 million for the same period last year.
Total Company revenues increased 2.9% to $64.5 million in the three months
ended March 31, 2002 compared to $62.7 million in the same period last year.
The $1.8 million increase was comprised of a $1.7 million increase in
restaurant sales, a $170,000 increase in royalty and franchise revenue, offset
by a $90,000 decrease in other revenue from the Company's aviation subsidiary.
The increase in restaurant sales was primarily due to an increase in customer
traffic and check average, resulting in an increase in same restaurant sales.
The Company operated 246 restaurants at March 31, 2002 compared to 250
restaurants at April 1, 2001.
Company-owned same restaurant sales increased 4.2%, compared to the same period
in 2001. The increase was primarily attributable to an increase in customer
traffic and an increase in average check amount for the three months ended
March 31, 2002 compared to the same period in 2001. The average customer
check for Company owned restaurants increased 2.6% to $4.70 for the three
months ended April 1, 2001, compared to $4.58 for the same period in 2001.
This increase resulted primarily from price increases implemented by the
Company in the third quarter of 2001.
Franchise fee income was $295,000 in the three months ended March 31, 2002
compared to $358,000 in the three months ended April 1, 2001. The decrease
in franchise fees, which are collected upon the opening of new franchise
restaurants, related directly to the fewer number of franchise restaurants
opened in the first quarter of 2002 compared to 2001. The Company's
franchisees opened five franchised restaurants in the three months ended
March 31, 2002 compared to eleven in the three months ended April 1, 2001.
Royalty revenue increased 17.3% to $1.6 million in the three months ended
March 31, 2002 from $1.4 million in the three months ended April 1, 2001.
The increase in royalty revenue, which is earned based on a percentage of
sales by franchise restaurants, was due to a 20.1% increase in franchise
restaurant sales resulting from an increase in the number of franchise
restaurants in operation, combined with an increase in same restaurant
sales for franchisee restaurants of 0.59%. The franchise system operated
169 restaurants at March 31, 2002 compared to 142 at April 1, 2001.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, was $1.6 million for the three months ended March 31, 2002
compared to $1.7 million for the three months ended April 1, 2001, a 5.2%
decrease. This decrease in revenue resulted from a 9.3% decrease in
retail jet fuel prices and a 7.3% increase in jet fuel volume sold during
the three months ended March 31, 2002 compared to the three months ended
April 1, 2001.
Cost of restaurant sales was $50.0 million for the three months ended
March 31, 2002 compared to $50.6 million for the three months ended
April 1, 2001. Food and paper costs as a percent of restaurant sales
decreased to 30.6% in the three months ended March 31, 2002 from 31.8% in the
three months ended April 1, 2001. The decrease in food and paper costs as a
percent of restaurant sales resulted primarily from improved restaurant level
controls over food and paper usage, a change in menu mix and the effect of
the Company's 1.62% price increase effected in the third quarter of 2001.
During the first quarter of fiscal 2001, the Company's menu included Chicken
Strippers as a limited time offering. The Chicken Stripper offering had a
higher food cost as a percentage of restaurant sales than other Company menu
offerings. Chicken Strippers are no longer included on the Company's menu.
The change in menu mix had the effect of increasing food cost by 0.2% in 2001.
Direct labor as a percent of restaurant sales decreased to 21.8% from 23.6% in
the prior year. Average wage increased 0.5% from $6.27 last year to $6.30 this
year. This increase was more than offset by operating efficiencies gained with
increased sales volumes and improvements in the utilization of store level
labor tracking systems.
Advertising expense increased 2.8% to $2.6 million in the three months ended
March 31, 2002 from $2.5 million in the same period in fiscal 2001.
Advertising expense is accrued based on 4.2% of restaurant sales and will
vary with the volume of such sales.
Depreciation and amortization expenses decreased $868,000, or 23.8%, to $2.8
million in the three months ended March 31, 2002 versus the same period in
2001. The decrease resulted primarily from a reduction in depreciation as a
result of the sale and leaseback of 32 restaurants on December 31, 2001, and a
reduction in goodwill amortization expense resulting from the adoption by the
Company of SFAS 142 as of December 31, 2001. Goodwill amortization expense
for the period ended April 1, 2001 was approximately $491,900.
General and administrative expenses for the three months ended March 31, 2002
was $4.4 million compared to $4.4 million for the same period in fiscal 2001.
Other expenses decreased $89,000, or 8.1%, to $1.0 million in the three
months ended March 31, 2002 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 March 31, 2002
compared to the same period in 2001.
The Company reported no gain on sale of assets for the three months ended
March 31, 2002 compared to $30,000 for the three months ended April 1, 2001.
The gain in the first quarter of 2001 resulted from the sale of a restaurant
to a franchisee.
Interest expense, net of interest income, decreased $814,000 to $2.5 million in
the three months ended March 31, 2002 from $3.3 million in the three months
ended April 1, 2001. This decrease resulted primarily from the Company's
retirement of a portion of the Notes and lower borrowings under its
Credit Facility during the quarter ended March 31, 2002 compared to the same
period in 2001.
The Company's provision for income taxes for the three months ended
March 31, 2002 increased $1.4 million, to a $501,000 tax expense from a
$872,000 tax benefit in the three months ended April 1, 2001.
The Company recorded an extraordinary gain of $2.7 million, net of income taxes
of $1.7 million, resulting from the repurchase and retirement of the
Company's Notes on December 31, 2001.
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 $11.6 million at March 31, 2002, compared to a
working capital deficit of $11.2 million at December 30, 2001.
Capital expenditures totaled approximately $1.2 million in the three months
ended March 31, 2002 as compared to $1.3 million in the three months ended
April 1, 2001. The Company opened no new restaurants during the three
months ended March 31, 2002 and April 1, 2001. Management estimates that
capital expenditures will be approximately $6.8 million during the remainder
of 2002. Capital expenditures for the remainder of the current year are
expected to include the refurbishment and remodeling of certain restaurants,
ongoing capital improvements, and the conversion of restaurant cash register
systems.
On December 31, 2001, the Company purchased $27.0 million aggregate principal
amount of its Notes through a tender offer. These Notes were retired
resulting in an extraordinary gain of $2.7 million. The extraordinary gain
resulted from retirement discounts of $5.4 million, offset by fees, taxes and
other costs of approximately $2.7 million.
0n January 28, 2002, the Company entered into a $25.0 million credit agreement
(the "Credit Facility"). The Credit Facility provides for $10,000,000 in
revolving loan commitments and a $15,000,000 term loan commitment, with
maturity dates of June 1, 2004 and January 28, 2007, respectively.
At March 31, 2002, the Company had available cash of approximately $13.7
million, receivables of $1.5 million, and $6.1 million available under the
Company's line of credit. In the opinion of management, these funds and funds
from operations will be sufficient to meet operating requirements, anticipated
capital expenditures and other obligations for the foreseeable future.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various legal proceedings incidental to its
business. The ultimate disposition of these matters is not presently
determinable but will not, in the opinion of management, have a material
adverse effect on the Company's financial condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits-
No exhibit is filed with this 10-Q.
(b) Reports on Form 8-K-
No Form 8-K was filed by the Registrant during the first quarter
of 2002.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
THE KRYSTAL COMPANY
(Registrant)
Dated: 5/10/02 /s/Larry D. Bentley
- --------------- ------------------------
Larry D. Bentley
(Vice President, Chief Financial Officer
and Principal Accounting Officer)