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 June 30, 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
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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 August 7, 2002.
THE KRYSTAL COMPANY
-------------------
JUNE 30, 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 June 30, 2002 and December 30, 2001, and (2) their change in
shareholder's equity for the six months ending June 30, 2002 and (3) the
results of their operations for the three and six months ended June 30, 2002
and July 1, 2001 and (4) their cash flows for the six months ended
June 30, 2002 and July 1, 2001 have been included. The results of
operations for the interim period ended June 30, 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)
June 30, December 30,
2002 2001
--------- ----------
ASSETS (Unaudited)
- ------
CURRENT ASSETS:
Cash and temporary investments $ 13,022 $ 13,042
Receivables, net 1,593 1,418
Inventories 1,729 2,033
Deferred income taxes 2,877 2,877
Prepayments and other 965 823
-------- --------
Total current assets 20,186 20,193
-------- --------
PROPERTY, BUILDINGS, AND EQUIPMENT, net 97,360 114,800
-------- --------
LEASED PROPERTIES, net 6,038 9,144
-------- --------
OTHER ASSETS:
Goodwill, net 40,759 40,759
Prepaid pension asset 8,374 8,754
Deferred financing costs, net 2,435 2,735
Other 1,041 1,605
-------- --------
Total other assets 52,609 53,853
-------- --------
TOTAL ASSETS $176,193 $197,990
======== ========
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
(In thousands)
June 30, December 30,
2002 2001
LIABILITIES AND SHAREHOLDER'S EQUITY ----------- ----------
- ------------------------------------ (Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 5,523 $ 5,175
Accrued liabilities 26,595 22,719
Current portion of long-term debt 1,479 1,361
Current portion of capital
lease obligations 1,214 2,133
-------- --------
Total current liabilities 34,811 31,388
-------- --------
LONG-TERM DEBT, excluding current portion 87,820 118,581
-------- --------
CAPITAL LEASE OBLIGATIONS, excluding
current portion 5,813 8,170
-------- --------
DEFERRED INCOME TAXES 7,471 8,912
-------- --------
OTHER LONG-TERM LIABILITIES 5,475 1,501
-------- --------
SHAREHOLDER'S EQUITY:
Common stock, without par value;
100 shares authorized, issued
and outstanding, at June 30, 2002,
and at December 30, 2001 35,000 35,000
Accumulated deficit ( 197) ( 5,562)
-------- --------
Total shareholder's equity 34,803 29,438
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $176,193 $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 For The Six
Months Ended Months Ended
-------------------- --------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------- -------- -------- --------
REVENUES:
Restaurant sales $ 62,941 $ 63,337 $123,937 $122,635
Franchise fees 302 145 597 503
Royalties 1,756 1,485 3,340 2,836
Other revenue 1,722 1,791 3,349 3,508
------- ------- ------- -------
66,721 66,758 131,223 129,482
------- ------- -------- --------
COST AND OTHER EXPENSES:
Cost of restaurant sales 50,739 53,628 100,697 104,264
Advertising expense 2,643 2,659 5,205 5,150
Depreciation and amortization
expenses 2,764 3,622 5,539 7,265
General and administrative
expenses 4,711 3,205 9,100 7,582
Other expenses, net 1,062 1,092 2,072 2,191
------- ------- ------- --------
61,919 64,206 122,613 126,452
------- ------- ------- --------
OPERATING INCOME 4,802 2,552 8,610 3,030
GAIN ON SALE OF ASSETS 11 566 11 596
INTEREST EXPENSE, net (2,410) (3,254) ( 4,901) ( 6,559)
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM 2,403 ( 136) 3,720 ( 2,933)
(PROVISION FOR) BENEFIT FROM INCOME TAXES ( 566) ( 39) ( 1,067) 833
------- ------- ------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,837 ( 175) 2,653 ( 2,100)
EXTRAORDINARY ITEM:
Gain on early retirement of debt, net
of applicable income tax expense of
$1,663 in 2002 2 -- 2,712 --
------- ------- ------- -------
Net income (loss) $ 1,839 $ ( 175) $ 5,365 $( 2,100)
======= ======= ======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
-----------------------------------------------
FOR THE SIX MONTHS ENDED
-------------------------
June 30, 2002
-------------
(In thousands)
(Unaudited)
Common Accumulated
Stock Deficit
-------- --------
BALANCE, December 30, 2001 $35,000 $( 5,562)
Net income -- 5,365
------- -------
BALANCE, June 30, 2002 $35,000 $( 197)
======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(Unaudited)
For The Six Months Ended
--------------------------
June 30, July 1,
2002 2001
--------- ---------
OPERATING ACTIVITIES:
Net income (loss) $ 5,365 $ (2,100)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities-
Depreciation and amortization 5,539 7,265
Change in deferred taxes ( 1,441) ( 80)
Gain on early retirement of debt ( 4,375) --
Gain on sale of assets ( 11) ( 596)
Changes in operating assets and liabilities:
Receivables, net ( 175) 128
Inventories 304 ( 49)
Prepayments and other ( 142) ( 498)
Accounts payable 348 ( 3,870)
Accrued liabilities 3,876 ( 1,335)
Other, net 1,167 619
-------- --------
Net cash provided by (used in)
operating activities 10,455 ( 516)
-------- --------
INVESTING ACTIVITIES:
Additions to property, buildings,
and equipment ( 4,265) ( 3,579)
Proceeds from sale of property,
buildings, and equipment 23,334 1,984
-------- -------
Net cash provided by (used in)
investing activities 19,069 ( 1,595)
-------- -------
FINANCING ACTIVITIES:
Net borrowings under revolving
credit facility ( 3,417) 2,075
Repayments of long-term debt (22,851) ( 76)
Outstanding checks in excess of
bank balance -- 800
Principal payments of
capital lease obligations ( 3,276) ( 981)
-------- -------
Net cash provided by (used in)
financing activities (29,544) 1,818
-------- --------
NET DECREASE IN CASH AND
TEMPORARY INVESTMENTS ( 20) ( 293)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 13,042 4,979
--------- -------
CASH AND TEMPORARY INVESTMENTS,
end of period $13,022 4,686
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 5,475 $ 6,395
======= =======
Income taxes $ 1,225 $ 69
======= =======
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 operating 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. Had the non-amortization provisions of SFAS 142 not been adopted,
net income would have been reduced by $491,900 and $983,900, respectively, in
the three months and six months ended June 30, 2002. 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.
Prior to the adoption of SFAS 142, the Company amortized goodwill over 25
years. Had the Company accounted for goodwill consistent with the
provisions of SFAS 142 in prior periods, the Company's net income would have
been affected as follows (in thousands):
For the Three For the Six
Months Ended Months Ended
------------------ ------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------- ------- -------- -------
Net income (loss) $1,839 $( 175) $5,365 $(2,100)
Add back: Goodwill amortization -0- 492 -0- 984
------ ------- ------ -------
Adjusted net income (loss) $1,839 $ 317 $5,365 $(1,116)
====== ======= ====== =======
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 $5,778,700
at June 30, 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. Amortization expense for deferred financing costs for the three
months ended June 30, 2002 was $150,600 and for the three months ended
July 1, 2001 was $135,900. Amortization expense for deferred financing costs
for the six months ended June 30, 2002 was $352,900 and for the six months
ended July 2001 was $271,700. Amortization expense for goodwill for the three
months ended July 1, 2001 was $491,900 and was $983,800 for the six months
ended July 1, 2001. Accumulated amortization of goodwill at June 30, 2002
and July 1, 2001 was $8,430,900 and $7,447,100, respectively. Accumulated
amortization of deferred financing costs at June 30, 2002 and July 1, 2001
was $3,343,400 and $2,778,300, 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 June 30, 2002, there were 173
franchised or licensed restaurants and at July 1, 2001, there were 148
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 June 30, 2002 and July 1, 2001, total deferred franchise
and license fees were approximately $958,500 and $995,000, 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.
Income Taxes --
During the second quarter of 2002, the Company revised its estimate of certain
tax liability contingencies resulting in a reduction of income tax expense
of $200,000.
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 financial statements for the
Company and the Subsidiary Guarantors as of June 30, 2002 and
December 30, 2001 and the six months ended June 30, 2002 and July 1, 2001.
The equity method has been used by the Company with respect to investments
in subsidiaries.
CONDENSED CONSOLIDATING BALANCE SHEET
At June 30, 2002 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
----------- ---------- ----------- -----------
Current Assets:
Cash and temporary investments $ 12,924 $ 98 $ -- $ 13,022
Receivables, net (13,225) 360 14,458 1,593
Inventories 1,659 70 -- 1,729
Deferred income taxes 2,876 1 -- 2,877
Prepayments and other 934 31 -- 965
-------- ------- ------- --------
Total current assets 5,168 560 14,458 20,186
-------- ------- ------- --------
Property, buildings, and equipment 128,513 5,731 -- 134,244
Accumulated depreciation (35,410) (1,474) -- ( 36,884)
-------- ------- ------- --------
Net property, buildings, and equipment 93,103 4,257 -- 97,360
-------- ------- ------- --------
Leased Properties, net 6,038 -- -- 6,038
-------- ------- ------- --------
Investment in Subsidiary 1 1 (2) --
-------- ------- ------- --------
Other Assets:
Goodwill, net 40,759 -- -- 40,759
Prepaid pension asset 8,374 -- -- 8,374
Deferred financing costs, net 2,435 -- -- 2,435
Other 1,025 16 1,041
-------- ------- ------- --------
Total other assets 52,593 16 -- 52,609
-------- ------- ------- --------
Total Assets $156,903 $ 4,834 $14,456 $176,193
======== ======= ======= ========
Current Liabilities:
Accounts payable $ (7,701) $(1,234) $14,458 $ 5,523
Accrued liabilities 26,295 300 -- 26,595
Current portion of long-term debt 1,250 229 -- 1,479
Current portion of capital lease
obligations 1,214 -- -- 1,214
-------- ------- ------- --------
Total current liabilities 21,058 ( 705) 14,458 34,811
-------- ------- ------- --------
Long Term Debt, excluding current
portion 86,313 1,507 -- 87,820
-------- ------- ------- --------
Capital Lease Obligations, excluding
current portion 5,813 -- -- 5,813
-------- ------- ------- --------
Deferred Income Taxes 7,487 ( 16) -- 7,471
-------- ------- ------- --------
Other Long-Term Liabilities 5,475 -- -- 5,475
-------- ------- ------- --------
Shareholder's Equity:
Common Stock 35,000 2 (2) 35,000
Retained Earnings (4,243) 4,046 -- ( 197)
-------- ------- ------- --------
Total shareholder's equity 30,757 4,048 (2) 34,803
-------- ------- ------- --------
Total Liabilities and Shareholder's
Equity $156,903 $ 4,834 $14,456 $176,193
======== ======= ======= ========
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 STATEMENT OF OPERATIONS
For the six months ended June 30, 2002 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
Revenues:
Restaurant sales $123,937 $ -- $ -- $123,937
Franchise fees 597 -- -- 597
Royalties 3,340 -- -- 3,340
Other revenue -- 3,349 -- 3,349
-------- ------- ------- --------
Total revenues 127,874 3,349 -- 131,223
-------- ------- ------- --------
Cost and Expenses:
Cost of restaurant sales 100,697 -- -- 100,697
Advertising expense 5,205 -- -- 5,205
Depreciation and amortization
expense 5,346 193 -- 5,539
General and administrative
expenses 8,950 150 -- 9,100
Other expenses, net ( 247) 2,319 -- 2,072
-------- ------- ------- --------
Total operating expenses 119,951 2,662 -- 122,613
-------- ------- ------- --------
Operating Income 7,923 687 -- 8,610
Gain on Sale of Assets -- 11 -- 11
Interest Expense, net (4,863) ( 38) -- ( 4,901)
-------- ------- ------- --------
Income Before Provision for Income
Taxes and Extraordinary Item 3,060 660 -- 3,720
Provision for Income Taxes ( 824) ( 243) -- ( 1,067)
-------- ------- ------- --------
Income Before Extraordinary Item 2,236 417 -- 2,653
Extraordinary Item:
Gain on early retirement of debt, net
of applicable income tax expense
of $1,663 in 2002 2,712 -- -- 2,712
-------- ------- ------- --------
Net Income $ 4,948 $ 417 $ -- $ 5,365
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the six months ended July 1, 2001 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
Revenues:
Restaurant sales $122,635 $ -- $ -- $122,635
Franchise fees 503 -- -- 503
Royalties 2,836 -- -- 2,836
Other revenue -- 3,508 -- 3,508
-------- ------- ------- --------
Total revenues 125,974 3,508 -- 129,482
-------- ------- ------- --------
Cost and Expenses:
Cost of restaurant sales 104,264 -- -- 104,264
Advertising expense 5,150 -- -- 5,150
Depreciation and amortization
expense 7,010 255 -- 7,265
General and administrative
expenses 7,455 127 -- 7,582
Other expenses, net ( 258) 2,449 -- 2,191
-------- ------- ------- --------
Total operating expenses 123,621 2,831 -- 126,452
-------- ------- ------- --------
Operating Income 2,353 677 -- 3,030
Gain on Sale of Assets 596 -- -- 596
Interest Expense, net ( 6,486) ( 73) -- ( 6,559)
-------- ------- ------- --------
Income (Loss) Before (Provision
For) Benefit From Income Taxes ( 3,537) 604 -- ( 2,933)
(Provision For) Benefit From
Income Taxes 1,062 ( 229) -- 833
-------- ------- ------- --------
Net Income (Loss) $( 2,475) $ 375 $ -- $( 2,100)
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2002 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- -------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,948 $ 417 $ -- $ 5,365
Adjustments to reconcile net income
to net cash provided by
operating activities -
Depreciation and amortization 5,346 193 -- 5,539
Change in deferred income taxes (1,441) -- -- (1,441)
Gain on early extinguishment of debt (4,375) -- -- (4,375)
Gain on sale of assets -- ( 11) -- ( 11)
Changes in operating assets and
liabilities:
Receivables, net ( 49) ( 126) -- ( 175)
Inventories 312 ( 8) -- 304
Prepayments and other ( 178) 36 -- ( 142)
Accounts payable 634 ( 286) -- 348
Accrued liabilities 3,956 ( 80) -- 3,876
Other, net 1,166 1 -- 1,167
-------- -------- ------- -------
Net cash provided by
operating activities 10,319 136 -- 10,455
-------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment ( 4,250) ( 15) -- ( 4,265)
Proceeds from the sale property,
buildings and equipment 23,323 11 -- 23,334
-------- ------- -------- -------
Net cash provided by (used in)
investing activities 19,073 ( 4) -- 19,069
-------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under
revolving credit facility ( 3,417) -- -- ( 3,417)
Repayments of long-term debt (22,740) ( 111) -- (22,851)
Principal payments of capital
lease obligations ( 3,276) -- -- ( 3,276)
-------- ------- ------- -------
Net cash used in
financing activities (29,433) ( 111) -- (29,544)
-------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS ( 41) 21 -- ( 20)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 12,965 77 -- 13,042
-------- ------- ------- -------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 12,924 $ 98 $ -- $ 13,022
======== ======= ======= =======
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended July 1, 2001 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $( 2,475) $ 375 $ -- $( 2,100)
Adjustments to reconcile net
income (loss) to net cash used in
operating activities -
Depreciation and amortization 7,010 255 -- 7,265
Change in deferred income taxes ( 80) -- -- ( 80)
Gain on sale of assets ( 596) -- -- ( 596)
Changes in operating assets and
liabilities:
Receivables, net ( 62) 190 -- 128
Inventories ( 49) -- -- ( 49)
Prepayments and other ( 543) 45 -- ( 498)
Accounts payable ( 2,861) ( 1,009) -- ( 3,870)
Accrued liabilities ( 1,199) ( 136) -- ( 1,335)
Other, net 619 -- -- 619
-------- ------- ------- --------
Net cash used in
operating activities ( 236) ( 280) -- ( 516)
-------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment ( 3,463) ( 116) -- ( 3,579)
Proceeds from the sale of property,
buildings and equipment 1,984 -- -- 1,984
-------- ------- ------- --------
Net cash used in investing
activities ( 1,479) ( 116) -- ( 1,595)
-------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under
revolving credit facility 2,075 -- -- 2,075
Repayments of long-term debt ( 5) ( 71) -- ( 76)
Outstanding checks in excess of
bank balance 758 42 -- 800
Principal payments of capital
lease obligations ( 981) -- -- ( 981)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities 1,847 ( 29) -- 1,818
-------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS 132 ( 425) -- ( 293)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 4,554 425 -- 4,979
-------- -------- ------- --------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 4,686 $ -- $ -- $ 4,686
======== ======== ======= ========
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:
- ----------------------------------------------------------------------------
June 30, July 1,
(in thousands) 2002 2001
- ----------------------------------------------------------------------------
Revenues:
Restaurants $123,937 $122,635
Franchising 3,937 3,339
FBO 3,349 3,508
- ----------------------------------------------------------------------------
Total segment revenues $131,223 $129,482
============================================================================
Depreciation and Amortization
Restaurants $ 5,293 $ 6,959
Franchising 2 2
FBO 94 155
- ----------------------------------------------------------------------------
Total segment depreciation and amortization $ 5,389 $ 7,116
============================================================================
Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
Restaurant $ 10,231 $ 7,289
Franchising 2,791 2,412
FBO 841 889
- ----------------------------------------------------------------------------
Total segment EBITDA $ 13,863 $ 10,590
============================================================================
June 30, December 30,
2002 2001
- -----------------------------------------------------------------------------
Capital Expenditures:
Restaurants $ 6,338 $ 5,665
Franchising 0 0
FBO 15 166
- -------------------------------------------------------------------------------
Total segment capital expenditures $ 6,353 $ 5,831
===============================================================================
Total Assets:
Restaurants $168,066 $189,695
Franchising 1,664 1,718
FBO 2,774 2,722
- -------------------------------------------------------------------------------
Total segment assets $172,504 $194,135
===============================================================================
A reconciliation of segment depreciation and amortization to consolidated
depreciation and amortization is as follows:
- -------------------------------------------------------------------------------
June 30, July 1,
2002 2001
- -------------------------------------------------------------------------------
Segment depreciation and amortization $ 5,389 $ 7,116
Unreported segments (1) 150 149
- -------------------------------------------------------------------------------
Total consolidated depreciation and amortization $ 5,539 $ 7,265
===============================================================================
A reconciliation of segment EBITDA to
consolidated EBITDA is as follows:
Segment EBITDA $ 13,863 $ 10,590
Unreported segments (1) 297 301
- -------------------------------------------------------------------------------
Total consolidated EBITDA $ 14,160 $ 10,891
===============================================================================
A reconciliation of segment total assets to consolidated total assets is as
follows:
- -------------------------------------------------------------------------------
June 30, December 30,
2002 2001
- -------------------------------------------------------------------------------
Total segment assets $172,504 $194,135
Unreported segments (1) 3,689 3,855
- -------------------------------------------------------------------------------
Total consolidated assets $176,193 $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 $10.0 million in
revolving loan commitments and a $15.0 million 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 $100.0 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.
On December 31, 2001 and May 30, 2002, the Company purchased $27.0 million and
$20,000, respectively, aggregate principal amount of its Notes. 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 in Other Long-Term Liabilities, 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 June 30, 2002 was $7.6
million compared to $6.2 million for the three months ended July 1, 2001, an
increase of 22.6%. This increase in cash operating profit was primarily
attributable to 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 For the Six
Months Ended Months Ended
-------------------- ---------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
--------- -------- --------- --------
RESTAURANT SALES:
Company owned $ 62,941 $ 63,337 $123,937 $122,635
Franchise 36,671 31,263 70,499 59,429
-------- -------- -------- --------
SYSTEMWIDE RESTAURANT SALES $ 99,612 $ 94,600 $194,436 $182,064
Percent change 5.33% 2.77% 6.81% 3.70%
COMPANY RESTAURANT STATISTICS:
Number of restaurants 246 247 246 247
Restaurant Sales $ 62,941 $ 63,337 $123,937 $122,635
Percent change (0.63%) (4.67%) 1.06% (4.26%)
Percent change in same restaurant sales 0.15% (1.38%) 2.11% (1.95%)
Selected components are --
Cost of restaurant sales $ 50,739 $ 53,628 $100,697 $104,264
As a percent of restaurant sales 80.63% 84.67% 81.24% 85.02%
Food and paper cost $ 19,078 $ 20,953 $ 37,748 $ 39,800
As a percent of restaurant sales 30.31% 33.08% 30.46% 32.45%
Direct labor $ 13,718 $ 14,345 $ 27,034 $ 28,363
As a percent of restaurant sales 21.80% 22.65% 21.81% 23.13%
Other labor costs $ 4,506 $ 4,927 $ 9,193 $ 9,996
As a percent of restaurant sales 7.16% 7.78% 7.42% 8.15%
Average check $ 4.75 $ 4.69 $ 4.72 $ 4.64
Percent change 1.28% 1.96% 1.72% 3.34%
FRANCHISE SYSTEM STATISTICS:
Number of restaurants 173 148 173 148
Restaurant Sales $ 36,671 $ 31,263 $ 70,499 $ 59,429
Percent change 17.30% 22.05% 18.63% 25.16%
Percent change in same restaurant sales (2.29%) (3.45%) (0.63%) (3.13%)
Average check $ 5.06 $ 4.97 $ 5.03 $ 4.92
Percent change 1.81% 5.52% 2.24% 6.72%
Comparison of the Three Months Ended June 30, 2002
---------------------------------------------------
to the Three Months Ended July 1, 2001
---------------------------------------
RESULTS OF OPERATIONS
---------------------
Total Krystal systemwide restaurant sales, which included restaurant sales of
$62.9 million for Company-owned and $36.7 million for franchised units, for the
three months ended June 30, 2002 increased 5.3% to $99.6 million compared to
$94.6 million for the same period in 2001.
Total Company revenues decreased $37,000 to $66.7 million in the three months
ended June 30, 2002 compared to the same period in 2001. The decrease was
comprised of a $396,000 decrease in restaurant sales, a $428,000 increase in
royalty and franchise revenue, and a $69,000 decrease in other revenue from
the Company's aviation subsidiary. The decrease in restaurant sales was
primarily due to a decrease in the number of Company owned restaurants in
operation during the period, offset by an increase in check average, resulting
in an increase in same restaurant sales for the period. The Company operated
246 restaurants at June 30, 2002 compared to 247 restaurants at July 1, 2001.
Company-owned same restaurant sales increased 0.2%, compared to the same period
in 2001. The increase was primarily attributable to an increase in average
check amount for the three months ended June 30, 2002 compared to the same
period in 2001. The average customer check for Company owned restaurants
increased 1.3% to $4.75 for the three months ended June 30, 2002, compared
to $4.69 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 $302,000 in the three months ended June 30, 2002
compared to $145,000 in the same period in 2001. The increase in franchise
fees, which are collected upon the opening, transfer or renewal of new
franchise restaurants, related primarily to the higher number of franchise
restaurants opened in the second quarter of 2002 compared to 2001. The
Company's franchisees opened seven franchised restaurants in the three
months ended June 30, 2002 compared to four in the same period in 2001.
Royalty revenue increased 18.3% to $1.8 million in the three months ended
June 30, 2002 from $1.5 million in the same period in 2001. The increase
in royalty revenue, which is earned based on a percentage of sales by franchise
restaurants, was due to a 17.3% increase in franchise restaurant sales
resulting from an increase in the number of franchise restaurants in operation.
The franchise system operated 173 restaurants at June 30, 2002 compared to
148 at July 1, 2001.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, was $1.7 million for the three months ended June 30, 2002
compared to $1.8 million for the same period in 2001, a 3.8% decrease.
This decrease in revenue resulted from a 6.6% decrease in retail jet fuel
prices and a 2.4% increase in jet fuel volume sold during the three months
ended June 30, 2002 compared to the same period in 2001.
Cost of restaurant sales was $50.7 million for the three months ended
June 30, 2002 compared to $53.6 million for the same period in 2001.
Food and paper costs as a percent of restaurant sales decreased to 30.3% in
the three months ended June 30, 2002 from 33.1% in the same period in 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 1.4% price increase effected
in the third quarter of 2001. During the second quarter of fiscal 2001, the
Company's menu included a Steak and Cheese sandwich as a limited time offering.
The Steak and Cheese offering had a higher food cost as a percentage of
restaurant sales than other Company menu offerings. The Steak and Cheese
sandwich is no longer included on the Company's menu. The change in menu mix
had the effect of decreasing food cost as a percentage of restaurant sales for
the three months ended June 30, 2002 by 1.2% as compared to the same period of
2001. Direct labor as a percent of restaurant sales decreased to 21.8% for
the three months ended June 30, 2002 from 22.6% for the same period in 2001.
Average hourly wage increased 0.5% to $6.37 for the three months ended
June 30, 2002 from $6.34 for the same period in 2001. This increase was more
than offset by operating efficiencies gained with improvements in the
utilization of store level labor tracking systems.
Advertising expense decreased 0.6% to $2.6 million in the three months ended
June 30, 2002 from $2.7 million in the same period in 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 $858,000, or 23.7%, to $2.8
million in the three months ended June 30, 2002 compared to 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
the elimination of goodwill amortization expense resulting from the adoption
by the Company of SFAS 142 as of December 31, 2001. Goodwill amortization
expense for the three months ended July 1, 2001 was approximately $491,900.
General and administrative expenses for the three months ended June 30, 2002
was $4.7 million compared to $3.2 million for the same period in fiscal 2001.
The increase resulted primarily from an increase of approximately $799,000 in
accruals for the management incentive plan, and an increase of approximately
$316,000 in expense associated with the Company's defined benefit plan. In the
first six months of 2001, the Company's performance failed to meet the criteria
for payment of management incentive bonuses and, accordingly, no provision was
made for such bonuses. In the first six months of 2002, the Company's year-to-
date performance warranted the accrual of funds for the anticipated
payment of such bonuses. The increase in expense associated with the defined
benefit plan results from the actuarial impact of lower investment returns and
lower interest rates assumed in the actuarial valuation performed for fiscal
2002 compared to the 2001 valuation. Because the Company's defined benefit
plan is currently over funded under the requirements of the Employee
Retirement Income Act of 1974, the increase in expense does not impact the
Company's funding policy for the defined benefit plan.
Other expenses decreased $30,000, or 2.8%, to $1.1 million in the three
months ended June 30, 2002 compared to the same period in 2001. 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 June 30, 2002
compared to the same period in 2001.
The Company recognized an $11,000 gain on sale of assets for the three months
ended June 30, 2002 compared to gains of $566,000 for the same period in 2001.
The gains in the second quarter of 2001 resulted from the sale of a
restaurant to a franchisee and the sale of non-operating properties.
Interest expense, net of interest income, decreased $844,000 to $2.4 million in
the three months ended June 30, 2002 from $3.3 million in the same period in
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 June 30, 2002.
The Company's provision for income taxes for the three months ended
June 30, 2002 increased $527,000, to $566,000 from $39,000, in the same
period in 2001. During the second quarter of 2002, the Company revised its
estimate of certain tax liability contingencies resulting in a reduction of
income tax expense of $200,000.
In the quarter ended June 30, 2002, the Company recognized an extraordinary
gain of $2,000, net of income taxes of $2,000, resulting from the repurchase
and retirement $20,000 aggregate principle amount of the Company's Notes.
Comparison of the Six Months Ended June 30, 2002
------------------------------------------------
to the Six Months Ended July 1, 2001
------------------------------------
RESULTS OF OPERATIONS
---------------------
Total Krystal systemwide restaurant sales, which included restaurant sales of
$123.9 million for Company-owned and $70.5 million for franchised units, for
the six months ended June 30, 2002 increased 6.8% to $194.4 million compared
to $182.1 million for the same period in 2001.
Total Company revenues increased 1.3% to $131.2 million in the six months
ended June 30, 2002 compared to $129.5 million in the same period in 2001.
The $1.7 million increase was comprised of a $1.3 million increase in
restaurant sales, a $598,000 increase in royalty and franchise revenue, offset
by a $159,000 decrease in other revenue from the Company's aviation subsidiary.
The increase in restaurant sales was primarily due to an increase in sales
volumes and check average, resulting in an increase in same restaurant sales.
The Company operated 246 restaurants at June 30, 2002 compared to 247
restaurants at July 1, 2001.
Company-owned same restaurant sales increased 2.1%, compared to the same period
in 2001. The increase was primarily attributable to an increase in sales
volumes and an increase in average check amount for the six months ended
June 30, 2002 compared to the same period in 2001. The average customer
check for Company owned restaurants increased 1.9% to $4.72 for the six
months ended June 30, 2002, compared to $4.63 for the same period in 2001.
This increase resulted primarily from price increases of approximately 1.4%
implemented by the Company in the third quarter of 2001.
Franchise fee income was $597,000 in the six months ended June 30, 2002
compared to $503,000 in the same period in 2001. The increase
in franchise fees, which are collected upon the opening, transfer or renewal
of franchise restaurants, related primarily to the collection of franchise
renewals, transfer, and extension fees, offset by a reduction in the number
of franchise restaurants opened in the first six months of 2002 compared to
2001. Franchise renewal, transfer and extension fees were approximately
$207,000 for the first six months of 2002 compared to $15,600 in the same
period in 2001. The Company's franchisees opened 12 franchised restaurants
in the six months ended June 30, 2002 compared to 15 in the same period in
2001. Royalty revenue increased 17.8% to $3.3 million in the six months
ended June 30, 2002 from $2.8 million in the same period in 2001. The
increase in royalty revenue, which is earned based on a percentage of sales
by franchise restaurants, was due to a 18.6% increase in franchise restaurant
sales resulting primarily from an increase in the number of franchise
restaurants in operation. The franchise system operated 173 restaurants at
June 30, 2002 compared to 148 at July 1, 2001.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, decreased 4.5% to $3.3 million for the six months ended
June 30, 2002 compared to $3.5 million for the same period in 2001.
This decrease in revenue resulted from a 2.5% decrease in retail jet fuel
prices offset by a 4.8% increase in jet fuel volume sold during the six months
ended June 30, 2002 compared to the same period in 2001.
Cost of restaurant sales was $100.7 million for the six months ended
June 30, 2002 compared to $104.3 million for the same period in 2001. Food
and paper costs as a percent of restaurant sales decreased to 30.5% in the
six months ended June 30, 2002 from 32.5% in the same period in 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 1.4% price increase
effected in the third quarter of 2001. During the first six months of fiscal
2001, the Company's menu included Chicken Strippers and a Steak and Cheese
Sandwich as limited time offerings. These menu offerings had a higher food
cost as a percentage of restaurant sales than other Company menu offerings.
Chicken Strippers and the Steak and Cheese Sandwich are no longer included on
the Company's menu. The change in menu mix had the effect of decreasing food
cost by 0.7% in the first six months of 2002 as compared to the same period of
2001. Direct labor as a percent of restaurant sales decreased to 21.8% in the
first six months of 2002 from 23.1% in the same period in 2001. Average
hourly wage increased 0.5% to $6.36 for the first six months of 2002 from
$6.33 for the first six months of 2001. 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 1.1% to $5.2 million in the six months ended
June 30, 2002 from $5.1 million in the same period in 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 $1.7 million, or 23.8%, to
$5.5 million in the six months ended June 30, 2002 compared to 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 six months ended July 1, 2001 was approximately $983,800.
General and administrative expenses for the six months ended June 30, 2002
was $9.1 million compared to $7.6 million for the same period in fiscal 2001.
The increase resulted primarily from an increase of approximately $960,000 in
accruals for the management incentive plan, and an increase of approximately
$578,000 in expense associated with the Company's defined benefit plan. In
the first six months of 2001, the Company's performance failed to meet the
criteria for payment of management incentive bonuses and, accordingly, no
provision was made for such bonuses. In the first six months of 2002, the
Company's year-to-date performance warranted the accrual of funds for the
anticipated payment of such bonuses. The increase in expense associated with
the defined benefit plan results from the actuarial impact of lower investment
returns and lower interest rates assumed in the actuarial valuation performed
for fiscal 2002 compared to the 2001 valuation. Because the Company's defined
benefit plan is currently over funded under the requirements of the Employee
Retirement Income Security Act of 1974, the increase in expense does not impact
the Company's funding policy for the defined benefit plan.
Other expenses decreased $119,000, or 5.4%, to $2.1 million in the six
months ended June 30, 2002 compared to the same period in 2001. This decrease
resulted primarily from a decrease in the wholesale cost of jet fuel purchased
by the Company's aviation subsidiary in the six months ended June 30, 2002
compared to the same period in 2001.
The Company recognized an $11,000 gain on sale of assets for the six months
ended June 30, 2002 compared to gains of $596,000 for the same period in 2001.
The gains in the first six months of 2001 resulted from the sale of a
restaurant to a franchisee and the sale of other non-operating properties.
Interest expense, net of interest income, decreased $1.7 million to $4.9
million in the six months ended June 30, 2002 from $6.6 million in the same
period in 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 six months ended June 30, 2002.
The Company's provision for income taxes for the six months ended
June 30, 2002 increased $1.9 million, to a $1.1 million tax expense from a
$833,000 tax benefit in the same period in 2001. During the second quarter of
2002, the Company revised its estimate of certain tax liability contingencies
resulting in a reduction of income tax expense of $200,000.
During the six months ended June 30, 2002, 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.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company does not maintain significant inventory or accounts receivables
since substantially all of its restaurants' sales are for cash. Royalties
from franchisees, which are payable weekly, and other receivables from
franchisees are closely monitored by the Company. 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 $14.6 million at June 30, 2002, compared to a
working capital deficit of $11.2 million at December 30, 2001.
Capital expenditures totaled approximately $4.3 million in the six months
ended June 30, 2002 as compared to $3.6 million in the same period in 2001.
The Company opened no new restaurants during the six months ended
June 30, 2002 or July 1, 2001. In addition, the Company purchased
approximately $2.7 million of leased assets previously recognized as capital
leases. Management estimates that capital expenditures will be approximately
$3.5 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 and May 28, 2002, the Company purchased $27.0 million
and $20,000, respectively, aggregate principal amount of its Notes. 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.
During the second quarter of 2002, the Company exercised its option to purchase
certain leased assets that were previously classified as capital leases on the
balance sheet. The assets were purchased for $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 June 30, 2002, the Company had available cash of approximately $13.0
million, receivables of $1.6 million, and $6.9 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 4. Submission of Matters to a Vote of Security Holders
By unanimous written consent dated April 18, 2002, Port Royal Holdings, Inc.,
the Company's sole shareholder, elected the following directors for the
Company: Philip H. Sanford, James F. Exum, Jr., Andrew G. Cope,
S. K. Johnston III, W. A. Bryan Patten, Richard C. Patton, Benjamin R. Probasco
and A. Alexander Taylor II.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits-
No exhibit is filed with this 10-Q.
(b) Reports on Form 8-K-
Form 8-K was filed by the Registrant during the second quarter
of 2002 stating a change in the Registrant's certifying accountant.
CERTIFICATION
-------------
The undersigned principal executive officer and principal financial officer of
the Company certify that (1) the undersigned has reviewed this report on
form 10-Q, (2) based on the undersigned's knowledge, this report does not
contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements made, in light of the
circumstances under which the statements were made, not misleading and
(3) based on the undersigned's knowledge, the financial statements, and
other financial information included in this report, fairly present in all
material respects the financial condition and results of operations of the
Company as of, and for, the periods presented in this report.
Dated: 8/7/02 /s/Philip H. Sanford
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Philip H. Sanford, Chairman and
Chief Executive Officer
/s/Larry D. Bentley
--------------------
Larry D. Bentley, Vice President
and Chief Financial Officer
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
THE KRYSTAL COMPANY
(Registrant)
Dated: 8/7/02 /s/Larry D. Bentley
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Larry D. Bentley
(Vice President, Chief Financial Officer
and Principal Accounting Officer)