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
For the quarterly period ended March 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-20040
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THE KRYSTAL COMPANY
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(Exact name of registrant as specified in its charter)
TENNESSEE 62-0264140
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(State or other jurisdiction of (IRS Employer identification
incorporation or organization) Number)
One Union Square, Chattanooga, TN 37402
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(Address of principal executive offices, including zip code)
(423) 757-1550
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
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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 4, 1998.
THE KRYSTAL COMPANY
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March 29, 1998
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PART I. FINANCIAL INFORMATION
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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 29, 1998 and December 29, 1997, and (2) the results of
their operations, their changes in shareholders' equity and their cash
flows for the three months ended March 29, 1998 and March 30, 1997 have
been included. The results of operations for the interim period ended
March 29, 1998 are not necessarily indicative of the results for the full
year.
This Form 10-Q contains certain forward-looking information that reflects
management's current outlook for 1998. These expectations are based
on the currently available competitive, financial and economic data
along with the Company's operating plans, and are subject to future events
and uncertainties. Among the Company's events and uncertainties which could
adversely affect 1998 results are lower than expected customer visits and/or
average expenditures resulting from marketplace competition, material changes
from expectations in the cost of materials or ingredients, an inability to
attract and retain a sufficient number of employees at expected wage rates,
material fluctuations in interest rates and economic downturns. 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 28, 1997.
PART I. FINANCIAL INFORMATION
-----------------------------
Item I. Financial Statements
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
March 29, December 28,
1998 1997
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(Unaudited) (Audited)
ASSETS
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CURRENT ASSETS:
Cash and temporary investments $ 6,691 $ 5,507
Receivables, net 7,379 1,477
Income tax receivable 4,672 4,582
Net investment in direct financing
leases-current portion 197 247
Inventories 1,858 2,241
Deferred income taxes 2,738 2,736
Prepayments and other 652 830
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Total current assets 24,187 17,620
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NET INVESTMENT IN DIRECT FINANCING
LEASES, excluding current portion 30 58
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PROPERTY, BUILDINGS, AND EQUIPMENT, net 99,680 101,200
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LEASED PROPERTIES, net 1,735 1,660
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OTHER ASSETS:
Cash surrender value of life insurance - 6,266
Prepaid pension asset 8,773 8,955
Deferred financing cost, net 5,194 5,359
Goodwill, net 48,209 48,674
Other 315 329
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Total other assets 62,491 69,583
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TOTAL ASSETS $188,123 $190,121
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<FN>
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
(In thousands)
March 29, December 28,
1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY ------- ---------
- ------------------------------------ (Unaudited) (Audited)
CURRENT LIABILITIES:
Accounts payable $ 5,284 $ 6,819
Accrued liabilities 22,762 19,399
Current portion of long-term debt 53 53
Current portion of capital
lease obligations 221 235
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Total current liabilities 28,320 26,506
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LONG-TERM DEBT, excluding current portion 111,285 112,174
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CAPITAL LEASE OBLIGATIONS, excluding
current portion 2,098 2,029
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DEFERRED INCOME TAXES 10,256 10,256
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OTHER LONG-TERM LIABILITIES 1,475 4,695
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SHAREHOLDERS' EQUITY:
Common stock, without par value;
100 shares authorized; issued
and outstanding, at March 29, 1998
and at December 28, 1997 35,000 35,000
Retained earnings ( 311) ( 539)
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Total shareholders' equity 34,689 34,461
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TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $188,123 $190,121
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<FN>
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands)
(Unaudited)
Post-Merger | Pre-Merger
Company | Company
----------- | ----------
For The Three Months Ended
-----------------------
March 29, | March 30,
1998 | 1997
-------- | --------
|
REVENUES: |
Restaurant sales $ 57,478 | $ 57,264
Franchise fees 127 | 41
Royalties 831 | 707
Other revenues 1,189 | 1,151
------- | -------
59,625 | 59,163
------- | -------
COST AND OTHER EXPENSES: |
Cost of restaurant sales 47,712 | 47,483
Depreciation and amortization |
expenses 3,232 | 2,622
General and administrative |
expenses 5,878 | 6,717
Other expenses, net 787 | 831
------- | -------
57,609 | 57,653
------- | -------
OPERATING INCOME 2,016 | 1,510
REORGANIZATION ITEM: |
Professional fees and |
other expenses - | ( 719)
|
GAIN ON SETTLEMENT OF DEFERRED |
COMPENSATION OBLIGATIONS 1,455 | -
INTEREST EXPENSE: |
Contractual rate interest, net ( 2,821) | ( 679)
Interest related to certain |
pre-petition liabilities, net - | ( 182)
------- | -------
INCOME (LOSS) BEFORE PROVISION FOR |
(BENEFIT FROM) INCOME TAXES AND |
EXTRAORDINARY ITEM 650 | ( 70)
PROVISION FOR (BENEFIT FROM) |
INCOME TAXES 422 | ( 27)
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INCOME (LOSS) BEFORE EXTRAORDINARY |
ITEM 228 | ( 43)
EXTRAORDINARY ITEM: |
Loss on early extinguishment of |
debt, net of applicable income |
tax benefit of $134,000 in 1997 - | ( 220)
------- | -------
NET INCOME (LOSS) $ 228 | $( 263)
======= | =======
<FN>
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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FOR THE THREE MONTHS ENDED
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MARCH 29, 1998 AND MARCH 30, 1997
---------------------------------
(In thousands)
(Unaudited)
Common Retained Deferred
Stock Earnings Compensation
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BALANCE, December 28, 1997 $35,000 $ ( 539) -
Net income - 228 -
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BALANCE, March 29, 1998 $35,000 $ ( 311) $ -
====== ====== ======
BALANCE, December 29, 1996 $40,556 $ 5,873 $(1,741)
Net loss - ( 263) -
Forfeiture of 13,200 restricted
shares ( 158) - 158
Amortization of deferred
compensation - - 48
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BALANCE, March 30, 1997 $40,398 $ 5,610 $(1,535)
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<FN>
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(Unaudited)
Post-Merger | Pre-Merger
Company | Company
----------- | ----------
For The Three Months Ended
------------|--------------
March 29,| March 30,
1998 | 1997
----------- | ------------
|
OPERATING ACTIVITIES: |
Net income(loss) $ 228 | $( 263)
Adjustments to reconcile net income(loss) |
to net cash provided by operating |
activities- |
Depreciation and amortization 3,232 | 2,622
Changes in deferred taxes ( 2) | 1
Loss on early extinguishment of debt - | 354
(Increase) decrease in receivables ( 400) | 854
(Increase) in income tax receivable ( 90) | ( 306)
Decrease in inventories 383 | 334
Decrease in prepayments and other 178 | 1,403
(Decrease) in accounts payable ( 1,535) | ( 779)
(Decrease) in income taxes payable - | ( 822)
Increase in accrued liabilities 3,363 | 2,858
Other ( 3,304) | ( 255)
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Net cash provided by operating activities 2,053 | 6,001
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INVESTING ACTIVITIES: |
Additions to property, buildings, |
and equipment ( 1,080) | (1,837)
Proceeds from sale of property, |
buildings, and equipment 95 | 332
Payments received on net investment in |
direct financing leases 78 | 189
-------- | --------
Net cash used in investing activities ( 907) | (1,316)
-------- | --------
FINANCING ACTIVITIES: |
Repayments of long-term debt ( 17) | ( 345)
Principal payments of capital |
lease obligations 55 | ( 153)
-------- | --------
Net cash used in financing activities 38 | ( 498)
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NET INCREASE IN CASH AND |
TEMPORARY INVESTMENTS 1,184 | 4,187
|
CASH AND TEMPORARY INVESTMENTS, |
beginning of period 5,507 | 28,765
-------- | --------
CASH AND TEMPORARY INVESTMENTS, |
end of period $ 6,691 | $32,952
======== | ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW |
INFORMATION: |
Cash paid during the period for: |
Interest $ 277 | $ 146
Income taxes 483 | 999
Reorganization item: professional fees |
and other expenses - | 729
======== | =======
<FN>
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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1. MERGER WITH PORT ROYAL HOLDINGS INC.
On September 26, 1997(effective September 29, 1997 for accounting purposes),
pursuant to an Agreement and Plan of Merger by and among the Company,
Port Royal Holdings, Inc. ("Port Royal") and TKC Acquisition Corp. dated
July 3, 1997, Port Royal acquired the Company for an aggregate purchase
price equal to $108,403,276 (the "Acquisition"). As a result of the merger,
each share of the Company's issued and outstanding stock prior to the merger
was converted into the right to receive $14.50 cash, and the Company became
a 100% wholly-owned subsidiary of Port Royal.
The purchase price for the Acquisition was funded through (i) a $35 million
equity contribution from Port Royal funded by a private equity placement,
(ii) borrowings under a revolving credit facility of $25 million with SunTrust
Bank, Atlanta, N.A., as agent and (iii) the sale of the Company's 10.25%
senior notes due 2007 in the aggregate principal amount of $100 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation --
The consolidated statements of operations, statements of shareholders' equity,
and statements of cash flows for the three months ended March 30, 1997 were
prepared using the Pre-Merger Company's historical basis of accounting. The
accompanying comparative consolidated financial statements as of and for the
three months ended March 29, 1998 were prepared under a new basis of
accounting that reflects the preliminary allocation of the fair value of
assets acquired and liabilities assumed, the related financing and acquisition
costs and all debt incurred in connection with the acquisition of Krystal by
Port Royal. Accordingly, the consolidated financial statements for periods
prior to September 29, 1997, including the financial statements as of
March 30, 1997 included herein, are not comparable to consolidated financial
statements on or subsequent to September 29, 1997. A black line on the
accompanying consolidated financial statements distinguishes between the
Pre-Merger and Post-Merger Company. Because the consolidated balance sheets
presented herein as of March 29, 1998 and December 28, 1997 are both prepared
as of dates subsequent to September 29, 1997, both balance sheets reflect the
post-merger basis of accounting.
Principles of Consolidation --
The accompanying consolidated financial statements include the accounts of
The Krystal Company and Aviation (herein after referred to collectively as
The "Company"). All significant intercompany balances and transactions have
been eliminated.
Cash and Temporary Investments --
For purposes of the consolidated statements of cash flows, the Company
considers repurchase agreements and other temporary cash investments with a
maturity of three months or less to be temporary investments.
Inventories --
Inventories are stated at cost and consist primarily of food, paper products
and other supplies. Prior to the acquisition of Krystal by Port Royal, the
Company used the last-in, first-out (LIFO) method of accounting for a
substantial portion of its inventories. Effective September 29, 1997, the
Company changed to the first-in, first-out (FIFO) method. The change in
accounting principle was made primarily to reflect inventory on the
consolidated balance sheet at a value that more closely represents current
cost at the date of the acquisition and merger. This accounting change
was not material to the financial statements on an annual or quarterly
basis, and accordingly, no retroactive restatement of prior years' financial
statements was made.
Property, Buildings and Equipment --
Prior to September 29, 1997, property, buildings and equipment are stated at
cost. Effective with the acquisition by Port Royal, property, buildings and
equipment were adjusted to their estimated fair values.
Expenditures which materially increase useful lives are capitalized, whereas
ordinary maintenance and repairs are expensed as incurred. Depreciation
of fixed assets is computed using the straight-line method for financial
reporting purposes and accelerated methods for tax purposes over the estimated
useful lives of the related assets as follows:
Buildings and improvements 10 - 39 years
Equipment 3 - 10 years
Leaseholds Life of lease up to 20 years
Long-lived assets --
The Company periodically evaluates the carrying value of long-lived assets
to be held and used when events or changes in circumstances warrant such a
review. The carrying value of a long-lived asset is considered impaired
when the projected undiscounted future cash flow of such asset is less than
its carrying value.
Intangibles --
The consolidated balance sheet of the post-merger Company includes the
preliminary allocation of purchase accounting goodwill of $49,187,000 and
deferred financing costs of $5,602,000. Intangibles are amortized on a
straight-line basis over 10 to 25 years. Amortization expense for goodwill
and deferred financing costs for the 3 months ended March 29, 1998 was
$495,000 and $204,000, respectively.
Franchise and License Agreements --
Franchise or license agreements are available for single and multi-unit
restaurants. The multi-unit agreement establishes the number of restaurants
the franchisee or licensee is to construct and open in the franchised area
during the term of the agreement.
Franchisees and licensees are required to pay the Company a franchise or
license fee and a weekly royalty and service fee of either 4.5% or 6.0%,
depending on the duration of the franchise agreement, of the restaurants'
gross receipts. Unit franchise and license fees are recorded as income as
related restaurants begin operations. Royalty and service fees, which are
based on restaurant sales of franchisees and licensees, are accrued as earned.
Franchise fees received prior to the opening of the restaurant are deferred
and included in accrued liabilities on the consolidated balance sheets.
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.
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.
3. SETTLEMENT OF DEFERRED COMPENSATION OBLIGATIONS
During the first quarter of 1998, the Company agreed to settle its obligations
under certain deferred compensation plans by making lump sum cash payments to
two retired executives. The Company realized a gain of $925,000 from this
transaction. The cash payments will be funded with the proceeds from
redeeming the cash surrender value of life insurance policies on the lives of
the retired executives. Also during the first quarter of 1998, the Company
realized a gain of $530,000 related to the receipt of life insurance proceeds
in excess of cash surrender value.
4. PETITION FOR RELIEF UNDER CHAPTER 11
On December 15, 1995, Krystal filed a voluntary petition under Chapter
11 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the Eastern District of Tennessee for the purpose
of completely and finally resolving the various claims filed against the
Company by current and former employees alleging violations of the Fair
Labor Standards Act of 1938 (FLSA).
In early 1997, Krystal and the majority of the FLSA plaintiffs reached a
settlement providing for the payment of the FLSA claims and related legal
costs. A plan of reorganization (the "Plan") was formally filed on
February 24, 1997. On April 10, 1997, the Bankruptcy Court confirmed the
Company's plan of reorganization and on April 23, 1997, the Plan became
final resulting in the dismissal of the FSLA claims.
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Comparison of the Three Months Ended March 29, 1998
---------------------------------------------------
to the Three Months Ended March 30, 1997
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BASIS OF ACCOUNTING
-------------------
On September 26, 1997 (effective September 29, 1997 for accounting purposes)
the Company was acquired by, and merged with a wholly-owned Subsidiary
of, Port Royal. The acquisition and merger were accounted for using the
purchase method of accounting. As a result, the period consisting of the
three months ended March 29, 1998 is not fully comparable to the
three months ended March 30, 1997.
CASH OPERATING PROFIT
---------------------
Cash Operating Profit (net income before consideration of interest, taxes,
depreciation, and other non-operating gains, loses 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 for the quarter ended March 29, 1998 increased $1.1
million to $5.2 million compared to $4.1 million in the same period in 1997.
The 27.0% increase in cash operating profit is primarily attributable to
management's efforts to reduce overall operating costs of the Company. The
results of these efforts are reflected primarily in the reduction in general
and administrative costs as a percentage of revenues. In addition, management
believes it has also made significant improvements in restaurant operations,
which will further reduce overall restaurant operating costs throughout fiscal
1998.
RESULTS OF OPERATIONS
---------------------
Total revenues increased 0.78% to $59.6 million for the first quarter of
1998 compared to $59.2 million for the same period of 1997.
Restaurant sales increased to $57.5 million in the first quarter of 1998 from
$57.3 million in the same period of 1997. The Company operated 245 restaurants
at the end of the first quarter of 1998 compared to 249 at the end of the
first quarter of 1997. Company-owned same restaurant sales for the first
quarter of 1998 were $233,000 compared to $231,000 for the same
period in 1997, an increase of 1.0%. The average customer check for
Company-owned restaurants (both full service and double drive-thru) for the
first quarter of 1998 was $3.84 as compared to $3.72 in the same period of
1997, an increase of 3.2%. The increase was due to product price increases
of approximately 2.6% in the first quarter of 1998 over the same period in
1997, and the introduction of new menu combinations which increased the
average customer check. The effect of price increases was partially offset
by a reduction in average customer count per restaurant day. Customer counts
per restaurant day decreased to 663 in the first quarter of 1998 compared to
664 in the same period of 1997. The Company believes a key factor in the
reduction of customer counts was the occurrence of the Easter Holiday during
April in 1998 versus during March in 1997. The sales weeks pre and post
Easter are generally periods of family travel and school vacations, and
therefore tend to increase restaurant and other retail sales. In 1997,
this activity occurred in the first quarter, while in 1998 this activity
will occur in the Company's second quarter. The Company believes this
change in holiday timing had the effect of reducing restaurant sales by
approximately $900,000.
Franchise fees and royalties increased $210,000 to $958,000 in the first
quarter of 1998 versus the same period in 1997. The increase in
franchise fees and royalties resulted from the increase in franchised
restaurants. The franchise system consisted of 105 restaurants at the end
of the first quarter of 1998 compared to 90 at the end of the first
quarter of 1997.
Other revenue, which comes from the Company's aviation subsidiary, was
$1.2 million in the first quarter of 1997 and 1996.
Cost of restaurant sales increased $229,000, approximately 0.5%, to
$47.7 million in the first quarter of 1998, from $47.5 million in the same
period of 1997. Cost of restaurant sales as a percentage of restaurant sales
increased to 83.0% in the first quarter of 1998 from 82.9% in the same period
of 1997. Total food and paper costs were $17.7 million in the first quarter
of 1998 as compared to $18.3 million in the first quarter of 1997. Food and
paper costs as a percentage of restaurant sales decreased to 30.9% in the
first quarter of 1998 as compared to 32.0% in the same period of 1997. Direct
labor cost in the first quarter of 1998 was $13.4 million as compared to
$12.8 million in the same period of 1997. Direct labor as a percent of
restaurant sales was 23.3% in the first quarter of 1998 compared to 22.4% for
the first quarter of 1997. The increase in direct labor costs as a percentage
of restaurant sales resulted from a 5.4% increase in the minimum wage,
effective September 1, 1997, which could not be fully offset by price
increases. Other restaurant labor cost as a percentage of restaurant sales
decreased to 7.9% in the first quarter of 1998 from 8.3% in the same period
of 1997.
Depreciation and amortization expenses increased $610,000, approximately
23.3%, to $3.2 million in the first quarter of 1998 as compared to $2.6
million for the same period in 1997. The increase in the first quarter
of 1998 is due to amortization of goodwill, financing costs and transaction
costs associated with the acquisition and merger of the Company with Port
Royal on September 26, 1997.
General and administrative expenses decreased by $839,000, approximately
12.5%, to $5.9 million in the first quarter of 1998 compared to $6.7 million
in the same period for 1997. The decrease in general and administrative
expense results from overall reductions in expenditures related to corporate
office activities. These reductions result from management's ongoing efforts
to restructure and streamline the management structure of the Company. The
single largest area of expense reduction is administrative salaries which
declined $100,000 to $1.8 million in the first quarter of 1998, compared
to $1.9 million in the same period of 1997. Other areas of cost reduction
include auto expense, corporate office rent and transportation costs.
In accordance with Statement of Position 90-7, Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code, issued by the American Institute
of Certified Public Accountants, the Company expensed Reorganization Items as
incurred. No such expenses were incurred during the first quarter of 1998
compared to $719,000 for the first quarter of 1997.
During the first quarter of 1998, the Company agreed to settle its obligations
under certain deferred compensation plans by making lump sum cash payments to
two retired executives. The Company realized a gain of $925,000 from this
transaction. The cash payments will be funded with the proceeds from
redeeming the cash surrender value of life insurance policies on the lives of
the retired executives. Also during the first quarter of 1998, the Company
realized a gain of $530,000 related to the receipt of life insurance proceeds
in excess of cash surrender value.
Contractual rate interest expense for the first quarter of 1998 increased
$2.1 million to $2.8 million as compared to $679,000 for the first quarter
of 1997. The interest expense increase is due to a $71.6 million increase
in long term debt to $111.3 million at the end of the first quarter 1998
compared to $39.7 million at the end of the first quarter 1997.
Provision for income taxes was $422,000 for the first quarter of 1998 as
compared to an income tax benefit of $27,000 for the same period in 1997.
The effective income tax rate of 65.0% in 1998 is more than the statutory
income tax rate primarily as a result of non-deductible amortization
associated with acquisition-related goodwill. The effective income tax rate
of 38.0% for the first quarter of 1997 approximates the combined statutory
federal and state income tax rates.
The Company recorded a loss of $220,000, net of tax benefit, in the first
quarter of 1997 related to the early extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company does not maintain significant inventory or accounts receivables
since substantially all of its restaurants' sales are for cash. Like many
restaurant businesses, the Company receives several weeks of trade credit in
purchasing food and supplies. The Company's receivables from franchisees are
closely monitored and collected weekly. The Company normally operates with
working capital deficits (current liabilities exceeding current assets) and
had a working capital deficit of $4.1 million at March 29, 1998,compared to a
working capital deficit of $2.7 million at March 30, 1997. During the first
quarter of 1998, the Company began the process of redeeming the cash
surrender value of certain insurance policies on the lives of two retired
executives. Amounts receivable under this process total $6.0 million and are
reported in current assets at March 29, 1998.
Capital expenditures totaled approximately $1.1 million in the first quarter
of 1998 compared to $1.8 million for the same period in 1997. The Company
opened no new restaurants during the first quarter of 1998 or during the same
period in 1997. Approximately $18.5 million is budgeted for capital
expenditures during the remainder of 1998. Capital expenditures are budgeted
for the construction of 5 restaurants to open in 1998, construction and/or
land acquisition for 13 restaurants to open in 1999, refurbishment of certain
restaurants and ongoing capital improvements.
At March 29, 1998, the Company had available cash of approximately $6.7
million, an insurance receivable of $6.0 million, an income tax receivable of
$4.7 million and availability under its credit line of $10.2 million.
Management believes these funds and funds from operations will be sufficient
to meet its operating requirements, anticipated capital expenditures and
other obligations for the foreseeable future.
YEAR 2000
---------
The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. Software failures due
to processing errors potentially arising from calculations using the year
2000 date are a known risk. The Company has developed a plan to ensure its
systems are compliant with the requirements to process transactions in the
year 2000. The majority of the Company's internal information systems is
estimated to be replaced with fully compliant new systems. The total cost
of the software and implementation is estimated to be $1,500,000 to
$2,000,000 which will be capitalized as incurred. The actual cash payments
will be made in 1998 as the implementation is expected to be completed.
The Company does not currently have any information concerning the year
2000 compliance status of its suppliers. In the event that any of the
Company's significant suppliers does not successfully and timely achieve
year 2000 compliance, the Company's business or operations could be
adversely affected.
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-
Exhibit-27 Financial Data Schedule is filed with this 10-Q.
(b) Reports on Form 8-K-
No Form 8-K was filed by the registrant during the quarter ended
March 29, 1998.
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: 05/5/98 /s/Larry D. Bentley
- -------------- ------------------------
Larry D. Bentley
(Vice President and Chief
Financial Officer)