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 September 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----- -----
Commission file number 0-20040
-------------------------------
THE KRYSTAL COMPANY
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TENNESSEE 62-0264140
--------- ----------
(State or other jurisdiction of (IRS Employer identification
incorporation or organization) Number)
One Union Square, Chattanooga, TN 37402
- -----------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(423) 757-1550
- -----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
---- ----
This report is filed by the Company pursuant to Section 15(d) of the
Securities Exchange Act of 1934. The Company has 100 shares of common
stock outstanding held of record by Port Royal Holdings, Inc. as of
November 10, 1998.
THE KRYSTAL COMPANY
-------------------
September 27, 1998
------------------
PART I. FINANCIAL INFORMATION
------------------------------
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading. These condensed financial
statements should be read in conjunction with the Company's latest
annual report on Form 10-K.
In the opinion of management of the Company, all adjustments necessary to
present fairly (1) the financial position of The Krystal Company and
Subsidiary as of September 27, 1998 and December 28, 1997, and (2) their change
in shareholders' equity for the nine months ending September 27, 1998 and (3)
the results of their operations, and their cash flows for the nine months ended
September 27, 1998 and September 28, 1997 and (4) the results of their
operations for the three months ended September 27, 1998 and September 28, 1997
have been included. The results of operations for the interim period ended
September 27, 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 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
----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
September 27, December 28,
1998 1997
-------- ---------
(Unaudited)
ASSETS
- -----------------
CURRENT ASSETS:
Cash and temporary investments $ 9,251 $ 5,507
Receivables, net 1,416 1,477
Income tax receivable 319 4,582
Inventories 2,200 2,241
Deferred income taxes 2,738 2,736
Prepayments and other 1,104 1,135
------- -------
Total current assets 17,028 17,678
------- -------
PROPERTY, BUILDINGS, AND EQUIPMENT, net 99,740 101,200
------- -------
LEASED PROPERTIES, net 1,621 1,660
------- -------
OTHER ASSETS:
Cash surrender value of life insurance - 6,266
Prepaid pension asset 8,410 8,955
Deferred financing cost, net 4,782 5,359
Goodwill, net 47,951 48,674
Other 287 329
------- -------
Total other assets 61,430 69,583
------- -------
TOTAL ASSETS $179,819 $190,121
======= =======
<FN>
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
(In thousands)
September 27, December 28,
1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY ------- ---------
- ------------------------------------ (Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 6,181 $ 6,819
Accrued liabilities 25,127 19,399
Current portion of long-term debt 53 53
Current portion of capital
lease obligations 179 235
------- -------
Total current liabilities 31,540 26,506
------- -------
LONG-TERM DEBT, excluding current portion 100,148 112,174
------- -------
CAPITAL LEASE OBLIGATIONS, excluding
current portion 2,000 2,029
------- -------
DEFERRED INCOME TAXES 10,256 10,256
------- -------
OTHER LONG-TERM LIABILITIES 1,556 4,695
------- -------
SHAREHOLDERS' EQUITY:
Common stock, without par value;
100 shares authorized; issued
and outstanding, at September 27, 1998,
and at December 28, 1997 35,000 35,000
Retained earnings (deficit) ( 681) ( 539)
------- -------
Total shareholders' equity 34,319 34,461
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $179,819 $190,121
======= =======
<FN>
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands)(Unaudited)
Post-Merger | Pre-Merger Post-Merger | Pre-Merger
Company | Company Company | Company
---------- | --------- ---------- | ----------
For the Three Months Ended, For the Nine Months Ended,
-----------|------- ----------|-------
Sept. 27, | Sept. 28, Sept. 27, | Sept. 28,
1998 | 1997 1998 | 1997
-------- | -------- -------- | --------
| |
REVENUES: | |
Restaurant sales $ 63,963 | $ 60,331 $180,627 | $178,815
Franchise fees 47 | 40 284 | 219
Royalties 971 | 758 2,715 | 2,232
Other revenues 1,290 | 1,118 3,816 | 3,469
------- | ------- ------- | -------
66,271 | 62,247 187,442 | 184,735
-------- | ------- ------- | -------
COST AND OTHER EXPENSES: | |
Cost of restaurant sales 53,183 | 50,878 149,800 | 148,393
Depreciation and amortization | |
expenses 3,225 | 2,921 9,670 | 8,216
General and administrative | |
expenses 6,839 | 5,825 18,716 | 19,656
Other expenses, net 810 | 776 2,433 | 2,444
------- | ------- ------- | -------
64,057 | 60,400 180,619 | 178,709
------- | ------- ------- | -------
OPERATING INCOME 2,214 | 1,847 6,823 | 6,026
REORGANIZATION ITEM: | |
Professional fees and | |
other expenses - | ( 156) - | ( 1,218)
| |
GAIN ON SETTLEMENT OF DEFERRED | |
COMPENSATION OBLIGATIONS - | - 1,805 | -
| |
INTEREST EXPENSE: | |
Contractual rate interest, net ( 2,394) | ( 811) ( 8,001)| ( 2,311)
Interest related to certain | |
pre-petition liabilities, net - | - - | 96
------- | ------- ------- | -------
INCOME (LOSS) BEFORE PROVISION | |
FOR INCOME TAXES AND | |
EXTRAORDINARY ITEM ( 180) | 880 627 | 2,593
| |
PROVISION FOR INCOME TAXES 107 | 279 769 | 928
------- | ------- ------- | -------
INCOME (LOSS) BEFORE EXTRAORDINARY | |
ITEM ( 287) | 601 ( 142)| 1,665
EXTRAORDINARY ITEM: | |
Loss on early extinguishment of | |
debt, net of applicable income | |
tax benefit of $134,000 in 1997 - | - - | ( 220)
------- | ------- ------- | -------
NET INCOME (LOSS) $( 287) |$ 601 $ ( 142)| $ 1,445
======= | ======== ======= | =======
<FN>
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 27, 1998
------------------
(In thousands)
(Unaudited)
Retained
Common Earnings
Stock (Deficit)
------ --------
BALANCE, December 28, 1997 $35,000 $( 539)
Net loss - ( 142)
------ ------
BALANCE, September 27, 1998 $35,000 $( 681)
====== ======
<FN>
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(Unaudited)
Post-Merger | Pre-Merger
Company | Company
------------ | ------------
For The Nine Months Ended,
--------------|-------------
Sept. 27, | Sept. 28,
1998 | 1997
----------- | ------------
|
OPERATING ACTIVITIES: |
Net income (loss) $( 142) | $ 1,445
Adjustments to reconcile net income (loss) |
to net cash provided by (used in) operating |
activities- |
Depreciation and amortization 9,670 | 8,216
Change in deferred taxes ( 2) | 5,035
Loss on early extinguishment of debt - | 354
(Increase)decrease in receivables 61 | (1,446)
(Increase)decrease in income tax receivable 4,263 | (4,524)
Decrease in inventories 41 | 266
(Increase)decrease in prepayments and other ( 174) | 905
Increase(decrease) in accounts payable ( 638) | 221
(Decrease) in income taxes payable - | ( 822)
Increase in accrued liabilities 4,978 | 271
Other 3,202 | ( 2,136)
Decrease in liabilities from reorganization |
activities - | (22,317)
-------- | --------
Net cash provided by (used in) |
operating activities 21,259 | (14,532)
-------- | --------
INVESTING ACTIVITIES: |
Additions to property, buildings, |
and equipment ( 7,566) | ( 5,507)
Proceeds from sale of property, |
buildings, and equipment 1,085 | 554
Payments received on net investment in |
direct financing leases 205 | 462
-------- | --------
Net cash used in investing activities ( 6,276) | ( 4,491)
-------- | --------
FINANCING ACTIVITIES: |
Decrease in debt from reorganization |
activities - | (36,000)
Proceeds from borrowing - | 36,320
Repayments of long-term debt (11,154) | ( 3,751)
Principal payments of capital |
lease obligations ( 85) | ( 385)
-------- | --------
Net cash used in financing activities (11,239) | ( 3,816)
-------- | --------
NET INCREASE (DECREASE) IN CASH AND |
TEMPORARY INVESTMENTS 3,744 | (22,839)
|
CASH AND TEMPORARY INVESTMENTS, |
beginning of period 5,507 | 28,765
-------- | --------
CASH AND TEMPORARY INVESTMENTS, |
end of period $ 9,251 | $ 5,926
======== | ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW |
INFORMATION: |
Cash paid during the period for: |
Interest $ 5,888 | $ 6,928
Income taxes 938 | 1,159
Reorganization item: professional fees |
and other expenses - | 2,531
======== | =======
<FN>
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
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 wholly-owned subsidiary of Port Royal. The Company prior to the Acquisition
is referred to herein as the "Pre-Merger Company." The Company after the
Acquisition is referred to as the "Post-Merger Company."
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
(the "Senior Notes").
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 and nine months ended
September 28, 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 and nine months ended September 27, 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 September 28, 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
September 27, 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, Krystal Aviation Co. and Krystal Aviation Management Co.
(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
allocation of purchase accounting goodwill of $49,910,000 and deferred
financing costs of $5,604,000. Intangibles are amortized on a
straight-line basis over 10 to 25 years. Amortization expense for goodwill
and deferred financing costs for the three months ended September 27, 1998 was
$490,000 and $206,000, and was $1,476,000 and $617,000 for the nine months
ended September 27, 1998, respectively.
Franchise and License Agreements --
Franchise or license agreements are entered 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%
of the restaurants' gross receipts depending on the duration of the franchise
agreement. Unit franchise and license fees are recorded as income as
related restaurants begin operations. Royalty and service fees, which are
based on restaurant sales of franchisees and licensees, are accrued as earned.
Franchise fees received prior to the opening of the restaurant are deferred
and included in accrued liabilities on the consolidated balance sheets.
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 nine months 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 were 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 nine months of 1998, the
Company realized a gain of $880,000 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.
5. SUMMARIZED FINANCIAL INFORMATION - SUBSIDIARY GUARANTORS
The Senior Notes are guaranteed by each of the Company's subsidiaries. The
guarantees are full, unconditional, joint and several obligations of each of
the subsidiary guarantors. Summarized financial information for the
subsidiary guarantors is set forth below. Separate financial statements for
the subsidiary guarantors of the Company are not presented because the
Company has determined that such financial statements would not be material
to investors. The subsidiary guarantors comprise all of the direct and
indirect subsidiaries of the Company. There are no restrictions on the
ability of the subsidiary guarantors to declare dividends, or make loans or
advances to the Company.
The following table presents summarized financial information for subsidiary
guarantors in connection with the Company's Senior Notes:
September 27, December 28,
1998 1997
------------ ------------
(in thousands)
Balance Sheet Data:
Current assets $ 259 $ 576
Noncurrent assets $1,318 $1,354
Current liabilities $ 794 $1,659
Non current liabilities $ 91 $ 131
Post-Merger | Pre-Merger
Company | Company
----------- | ------------
For the nine months ended
Sept. 27, | Sept. 28,
1998 | 1997
---------- | ----------
(in thousands) |
Income Statement Data: |
Net sales $3,816 | $3,469
Gross profit $1,204 | $ 889
Income before provision for Federal |
and state income taxes $ 888 | $ 471
Net income $ 552 | $ 293
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
The following table reflects certain key operating statistics which impact the
Company's financial results:
KEY OPERATING STATISTICS
(Dollars in thousands except average check)
Post-Merger|Pre-Merger Post-Merger|Pre-Merger
Company | Company Company | Company
-----------| ---------- ----------| ----------
For the three For the nine
months ended, months ended,
----------------- -----------------
Sept. 27,| Sept. 28, Sept. 27, | Sept. 28,
1998 | 1997 1998 | 1997
-------| -------- -------- |--------
| |
SYSTEMWIDE RESTAURANT SALES $84,707 | $77,479 $238,601 |$228,202
Percent change 9.33% | 4.56% |
| |
COMPANY RESTAURANT STATISTICS: | |
| |
Number of restaurants 244 | 249 244 | 249
| |
Restaurant Sales $63,963 | $60,331 $180,627 |$178,815
Percent change 6.02% | 1.01% |
| |
Same restaurant sales $63,432 | $59,386 $179,067 |$176,049
Percent change 6.81% | 1.71% |
| |
Average same restaurant sales $ 262 | $ 245 $ 740 |$ 727
Percent change 6.81% | 1.71% |
| |
Customer count per day 709 | 690 685 | 691
Percent change 2.75% | (0.87%) |
| |
Average check $ 4.06 | $ 3.83 $ 3.93 |$ 3.78
Percent change 6.01% | 3.97% |
| |
Cost of restaurant sales $53,183 | $50,878 $149,800 |$148,393
As a percent of restaurant sales 83.15% | 84.33% 82.93% | 82.99%
| |
Food and paper cost $19,893 | $19,598 $ 55,544 |$ 57,713
As a percent of restaurant sales 31.10% | 32.48% 30.75% | 32.28%
| |
Direct labor $15,170 | $13,599 $ 42,361 |$ 39,861
As a percent of restaurant sales 23.72% | 22.54% 23.45% | 22.29%
| |
Other labor costs $ 4,373 | $ 4,688 $ 13,270 |$ 14,271
As a percent of restaurant sales 6.84% | 7.77% 7.35% | 7.98%
| |
FRANCHISE SYSTEM STATISTICS: | |
| |
Number of restaurants 109 | 95 109 | 95
| |
Restaurant Sales $20,744 | $17,148 $ 57,974 |$ 49,387
Percent change 20.97% | 17.39% |
| |
Same restaurant sales $15,873 | $15,073 $ 41,646 |$ 40,369
Percent change 5.30% | 3.16% |
| |
Average same restaurant sales $ 189 | $ 179 $ 555 |$ 538
Percent change 5.31% | 3.16% |
| |
Customer count per day 495 | 490 483 | 489
Percent change 1.02% | (1.23%) |
| |
Average check $ 4.22 | $ 4.10 $ 4.14 |$ 4.07
Percent change 2.93% | 1.72% |
| |
| |
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 and nine months ended September 27, 1998 is not fully comparable to the
three and nine months ended September 28, 1997.
Comparison of the Three Months Ended September 27, 1998
-------------------------------------------------------
to the Three Months Ended September 28, 1997
--------------------------------------------
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 for the three months ended September 27, 1998 increased
$600,000 to $5.4 million compared to $4.8 million in the same period in 1997.
The 12.5% increase in cash operating profit is primarily attributable to
reduced overall operating costs of the Company, and improvements in restaurant
operations, which management believes should result in reduced overall
restaurant operating costs throughout fiscal 1998.
RESULTS OF OPERATIONS
---------------------
Total revenues increased 6.46% to $66.3 million for the third quarter of 1998
compared to $62.2 million for the same period of 1997.
Restaurant sales increased 6.02% to $64.0 million in the third quarter of 1998
from $60.3 million in the same period of 1997. The Company operated 244
restaurants at the end of the third quarter of 1998 compared to 249 at the end
of the third quarter of 1997. Company-owned average same restaurant sales for
the third quarter of 1998 increased 6.8% to $262,000 compared to $245,000 for
the same period in 1997. The average customer check for Company-owned
restaurants (both full service and double drive-thru) for the third quarter
of 1998 increased 6.01% to $4.06 as compared to $3.83 in the same period of
1997, an increase of 6.0%. Customer counts per restaurant day increased 2.75%
to 709 in the third quarter of 1998 compared to 690 in the same period of 1997.
Key factors in the increase in restaurant sales, check averages, and customer
counts included promotional activity, an approximately 1.4% price increase in
the third quarter of 1998 over the same period in 1997, the introduction of
new menu combinations and the June 1998 introduction of the Krystal Chik
sandwich, which accounted for approximately 13.0% of restaurant sales in the
third quarter of 1998.
Franchise fees and royalties increased $220,000 to $1,018,000 in the third
quarter of 1998 versus the same period in 1997. The increase in franchise
fees and royalties resulted primarily from an increase in royalties resulting
from an increase in overall franchise restaurant sales. The franchise system
operated 109 restaurants at the end of the third quarter of 1998 compared to
95 at the end of the third quarter of 1997. The increase in the number of
operating franchise restaurants, combined with a 5.3% increase in same
restaurant sales for existing franchise restaurants, contributed to a 20.97%
increase in overall franchise restaurant sales. The increase in same
restaurant sales resulted primarily from more effective promotional activity
and the introduction of the Krystal Chik sandwich in June of 1998.
Other revenue, which comes from the Company's aviation subsidiary, was
$1.3 million in the third quarter of 1998 versus $1.1 million for the
third quarter of 1997.
Cost of restaurant sales increased $2.3 million, approximately 4.5%, to
$53.2 million in the third quarter of 1998, from $50.9 million in the same
period of 1997. Cost of restaurant sales as a percentage of restaurant sales
decreased to 83.1% in the third quarter of 1998 from 84.3% in the same period
of 1997. Total food and paper costs were $19.9 million in the third quarter
of 1998 as compared to $19.6 million in the third quarter of 1997. Food and
paper costs as a percentage of restaurant sales decreased to 31.1% in the
third quarter of 1998 as compared to 32.5% in the same period of 1997. This
decrease resulted primarily from improved food and paper purchasing practices
established by the Company during 1998. Direct labor cost in the third
quarter of 1998 was $15.2 million compared to $13.6 million in the same period
of 1997. Direct labor as a percent of restaurant sales was 23.7% in the third
quarter of 1998 compared to 22.5% for the third quarter of 1997. The increase
in direct labor costs as a percentage of restaurant sales resulted in part
from a 5.4% increase in the minimum wage, effective September 1, 1997, which
could not be fully offset by price increases and sales volume. In addition,
the Company has at various times since April 1998 implemented various wage
increases in certain markets throughout its restaurant system. These wage
increases which range from 1.0% to 3.0% were designed to attract better
qualified employees. Other restaurant labor cost as a percentage of
restaurant sales decreased to 6.8% in the third quarter of 1998 from 7.8% in
the same period of 1997.
Depreciation and amortization expenses increased $304,000, approximately
10.4%, to $3.2 million in the third quarter of 1998 as compared to $2.9
million for the same period in 1997. The increase in the third quarter
of 1998 was 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 increased by $1.0 million, approximately
17.4%, to $6.8 million in the third quarter of 1998 compared to $5.8 million
in the same period for 1997. The increase in general and administrative
expense resulted from an increase of $670,000 in group insurance expense in
the third quarter of 1998 over the same period in 1997 and an increase in the
pension plan expense of $376,000 in the third quarter of 1998 over the same
period of 1997. The Company also expensed during the third quarter obsolete
inventory of $190,000 and recorded a charge of $200,000 to reserve for certain
impaired fixed assets. There were no such charges in the third quarter
of 1997.
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 third quarter of 1998
compared to $156,000 for the third quarter of 1997.
Interest expense for the third quarter of 1998 increased $1.6 million to
$2.4 million as compared to $811,000 for the third quarter of 1997. The
interest expense increase was due to an increase in long term debt of
$63.6 million to $100.2 million at the end of the third quarter 1998
compared to $36.6 million at the end of the third quarter 1997.
Provision for income taxes was $107,000 for the third quarter of 1998 as
compared to an income tax expense of 279,000 for the same period in 1997.
The effective income tax rate of 159.0% 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 31.7% for the third quarter of 1997 approximated statutory income tax rates.
Comparison of the Nine Months Ended September 27, 1998
------------------------------------------------------
to the Nine Months Ended September 28, 1997
-------------------------------------------
CASH OPERATING PROFIT
---------------------
Cash operating profit for the nine months ended September 27, 1998 increased
$2.3 million to $16.5 million compared to $14.2 million in the same period
in 1997. The 16.2% increase in cash operating profit was primarily
attributable to reduced overall operating costs of the Company, and
improvements in restaurant operations, which management believes should result
in reduced overall restaurant operating costs throughout fiscal 1998.
RESULTS OF OPERATIONS
---------------------
Total revenues increased 1.47% to $187.4 million for the first nine months of
1998 compared to $184.7 million for the same period of 1997.
Restaurant sales increased to $180.6 million in the first nine months of 1998
from $178.8 million in the same period of 1997. The Company operated 244
restaurants at the end of the third quarter of 1998 compared to 249 at the
end of the third quarter of 1997. Company-owned average same restaurant
sales for the first nine months of 1998 increased 1.71% to $740,000 compared
to $727,000 for the same period in 1997. The average customer check for
Company-owned restaurants (both full service and double drive-thru) for the
first nine months of 1998 increased 3.97% to $3.93 as compared to $3.78 in
the same period of 1997. The increase was due to product price increases of
approximately 2.1% in the first nine months of 1998 over the same period in
1997, the introduction of new menu combinations, and the introduction of the
Krystal Chik sandwich in June of 1998. Customer counts per restaurant day
decreased to 685 in the first nine months of 1998 compared to 691 in the same
period of 1997. The decrease in customer counts resulted primarily from weaker
than normal customer counts during the second quarter of 1998. Second quarter
customer counts were adversely impacted by the Company's discontinuing certain
menu items and a reduction in discount driven promotional activity. In
addition competitors in the industry conducted heavy promotional activity
during the second quarter of 1998 resulting in adverse effects on the
Company's customer counts and sales. Customer counts per restaurant showed
improvement during the third quarter due in part to the introduction of the
Krystal Chik sandwich and reduced promotional activity by competitors.
Franchise fees and royalties increased $548,000 to $3.0 million in the first
nine months of 1998 versus the same period in 1997. The increase in franchise
fees and royalties resulted from an increase in fees received from the opening
of new franchise restaurants and an increase in royalties resulting from an
increase in overall franchise restaurant sales. The franchise system
consisted of 109 restaurants at the end of the first nine months of 1998
compared to 95 at the end of the first nine months of 1997. The increase in
the number of operating franchise restaurants, combined with a 3.16% increase
in same restaurant sales for existing franchise restaurants, contributed to a
17.39% increase in overall franchise restaurant sales. The increase in same
restaurant sales resulted primarily from more effective promotional activity
and the introduction of the Krystal Chik sandwich in June of 1998.
Other revenue, which comes from the Company's aviation subsidiary, was
$3.8 million in the first nine months of 1998 compared to $3.5 in the first
nine months of 1997.
Cost of restaurant sales increased $1.4 million, approximately 1.0%, to
$149.8 million in the first nine months of 1998, from $148.4 million in the
same period of 1997. Cost of restaurant sales as a percentage of restaurant
sales decreased to 82.9% in the first nine months of 1998 from 83.0% in the
same period of 1997. Total food and paper costs were $55.5 million in the
first nine months of 1998 as compared to $57.7 million in the first nine months
of 1997. Food and paper costs as a percentage of restaurant sales decreased to
30.8% in the first nine months of 1998 as compared to 32.3% in the same period
of 1997. This decrease resulted primarily from improved food and paper
purchasing practices established by the Company during 1998. Direct labor
cost in the first nine months of 1998 was $42.4 million as compared to
$39.9 million in the same period of 1997. Direct labor as a percent of
restaurant sales was 23.5% in the first nine months of 1998 compared to 22.3%
for the first nine months of 1997. The increase in direct labor costs as a
percentage of restaurant sales resulted in part from a 5.4% increase in
the minimum wage, effective September 1, 1997, which could not be fully offset
by price increases. In addition, the Company has at various times since
April 1998 implemented various wage increases in certain markets throughout
its restaurant system. These wage increases which range from 1.0% to 3.0%
were designed attract better qualified employees. Other restaurant labor
cost as a percentage of restaurant sales decreased to 7.4% in the first nine
months of 1998 from 8.0% in the same period of 1997.
Depreciation and amortization expenses increased $1.5 million, approximately
17.7%, to $9.7 million in the first nine months of 1998 as compared to $8.2
million for the same period in 1997. The increase in the first nine months
of 1998 was 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 $1.0 million, approximately
4.8%, to $18.7 million in the first nine months of 1998 compared to $19.7
million in the same period for 1997. The decrease in general and
administrative expense resulted from overall reductions in expenditures related
to corporate office activities. These reductions resulted from management's
ongoing efforts to restructure and streamline the management structure of the
Company. The single largest area of expense reduction was administrative
salaries, which declined $800,000 to $5.2 million in the first nine months of
1998, compared to $6.0 million in the same period of 1997. Other areas of
cost reduction include auto expense, corporate office rent, office
maintenance, office supplies, and product testing.
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 nine months of 1998
compared to $1.2 million for the first nine months of 1997.
During the first nine months 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 was 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 nine months of 1998, the Company
realized a gain of $880,000 related to the receipt of life insurance proceeds
in excess of cash surrender value.
Interest expense for the first nine months of 1998 increased $5.7 million
to $8.0 million as compared to $2.3 million for the first nine months of 1997.
The interest expense increase is due to an increase in long term debt of
$63.6 million to $100.2 million at the end of the first nine months of 1998
compared to $36.6 million at the end of the first nine months of 1997.
Provision for income taxes was $769,000 for the first nine months of 1998 as
compared to $928,000 for the same period in 1997. The effective income tax
rate of 122.6% 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 35.8% for the first nine months of
1997 approximates statutory income tax rates.
The Company recorded a loss of $220,000, net of tax benefit, in the first
nine months 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 $14.5 million at September 27, 1998,compared
to a working capital deficit of $4.8 million at September 28, 1997. During
the first nine months of 1998, the Company redeemed the cash surrender value
of certain insurance policies on the lives of retired executives. Amounts
received under these policies totaled $6.0 million and were used to settle
deferred compensation plans for two former executives and to reduce long term
debt.
Capital expenditures totaled approximately $7.6 million in the first nine
months of 1998 compared to $5.5 million for the same period in 1997. The
Company opened two new restaurants during the first nine months of 1998 and
opened none during the same period in 1997. Approximately $7.5 million
is budgeted for capital expenditures during the remainder of 1998. Capital
expenditures are budgeted in 1998 for the construction of 3 restaurants to
open in 1998, construction and/or land acquisition for 13 restaurants to open
in 1999, and the refurbishment of certain restaurants and ongoing capital
improvements.
At September 27, 1998, the Company had available cash of approximately
$9.3 million, receivables of $1.4 million, and an income tax receivable of
$319,000 and availability under its credit line of $21.4 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
to be replaced with fully compliant new systems. The total cost of the
software and implementation is estimated to be $2,500,000 to $3,000,000,
and is being capitalized as incurred.
The company has surveyed its major suppliers for information concerning
their year 2000 compliance. To date, none of the Company's major suppliers
has indicated the likelihood of non-compliance by the year 2000. There are
a number of suppliers who have not yet responded to the survey and
the Company does not currently have any information concerning the year
2000 compliance status of those 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.
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 third quarter
of 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: 11/10/98 /s/Larry D. Bentley
- -------------- ------------------------
Larry D. Bentley
(Vice President and Chief Financial
and Accounting Officer)