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 April 4, 1999
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 333-40933
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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 3, 1999.
THE KRYSTAL COMPANY
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April 4, 1999
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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 April 4, 1999 and January 3, 1999, and (2) their change in
shareholder's equity for the three months ended April 4, 1999, (3) and the
results of their operations and cash flows for the three months ended
April 4, 1999 and March 29, 1998. The results of operations for the interim
period ended April 4, 1999 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 are contained in this 10-Q. These
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 and the possible effects of the
year 2000 problem on the Company, including such problems at the Company's
vendors, counterparties and customers and the impact of competition. 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 information provided herein should be read in conjunction with
information provided in the Company's Form 10-K for the fiscal year ended
January 3, 1999.
PART I. FINANCIAL INFORMATION
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Item I. Financial Statements
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS
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(In thousands)
April 4, January 3,
1999 1999
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(Unaudited) (Audited)
ASSETS
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CURRENT ASSETS:
Cash and temporary investments $ 8,480 $ 9,012
Receivables, net 1,092 2,305
Net investment in direct financing
leases-current portion 43 58
Inventories 1,502 1,684
Deferred income taxes 2,817 2,817
Prepayments and other 464 720
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Total current assets 14,398 16,596
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PROPERTY, BUILDINGS, AND EQUIPMENT, net 98,963 99,694
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LEASED PROPERTIES, net 3,362 2,595
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OTHER ASSETS:
Prepaid pension asset 8,059 8,329
Deferred financing cost, net 4,371 4,577
Goodwill, net 46,929 47,429
Other 256 268
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Total other assets 59,615 60,603
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TOTAL ASSETS $176,338 $179,488
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See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS (CONTINUED)
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(In thousands)
April 4, January 3,
1999 1999
LIABILITIES AND SHAREHOLDER'S EQUITY ---------- ----------
- ------------------------------------ (Unaudited) (Audited)
CURRENT LIABILITIES:
Accounts payable $ 5,235 $ 5,009
Accrued liabilities 16,803 22,253
Current portion of long-term debt 50 53
Current portion of capital
lease obligations 215 346
Income taxes payable 662 --
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Total current liabilities 22,965 27,661
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LONG-TERM DEBT, excluding current portion 100,122 100,136
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CAPITAL LEASE OBLIGATIONS, excluding
current portion 3,718 2,806
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DEFERRED INCOME TAXES 11,735 11,735
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OTHER LONG-TERM LIABILITIES 1,517 1,344
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SHAREHOLDER'S EQUITY:
Common stock, without par value;
100 shares authorized; issued
and outstanding, at April 4, 1999,
and at January 3, 1999 35,000 35,000
Retained earnings 1,281 806
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Total shareholder's equity 36,281 35,806
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TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $176,338 $179,488
======== ========
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF OPERATIONS
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(In thousands)(Unaudited)
For the Three Months Ended
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April 4, March 29,
1999 1998
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REVENUES:
Restaurant sales $63,248 $57,478
Franchise fees -- 127
Royalties 1,043 831
Other revenues 1,356 1,189
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65,647 59,625
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COST AND OTHER EXPENSES:
Cost of restaurant sales 51,604 47,712
Depreciation and amortization
expenses 3,175 3,232
General and administrative
expenses 6,392 5,878
Other expenses, net 794 787
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61,965 57,609
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OPERATING INCOME 3,682 2,016
GAIN ON SETTLEMENT OF DEFERRED
COMPENSATION OBLIGATIONS -- 1,455
INTEREST EXPENSE, net ( 2,545) (2,821)
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INCOME BEFORE PROVISION
FOR INCOME TAXES 1,137 650
PROVISION FOR INCOME TAXES ( 662) ( 422)
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NET INCOME $ 475 $ 228
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See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
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FOR THE THREE MONTHS ENDED
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APRIL 4, 1999
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(In thousands)
(Unaudited)
Common Retained
Stock Earnings
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BALANCE, January 3, 1999 $35,000 $ 806
Net income - 475
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BALANCE, April 4, 1999 $35,000 $ 1,281
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See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(In thousands)
(Unaudited)
For The Three Months Ended
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April 4, March 29,
1999 1998
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OPERATING ACTIVITIES:
Net income $ 475 $ 228
Adjustments to reconcile net income
to net cash provided by operating
activities-
Depreciation and amortization 3,175 3,232
Change in deferred taxes -- ( 2)
Changes in operating assets and
liabilities:
Receivables, net 1,213 ( 400)
Income tax receivable -- ( 90)
Inventories 182 383
Prepayments and other 256 178
Accounts payable 226 (1,535)
Income taxes payable 662 -
Accrued liabilities (5,450) 3,363
Other, net 336 (3,304)
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Net cash provided by
operating activities 1,075 2,053
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INVESTING ACTIVITIES:
Additions to property, buildings,
and equipment ( 2,620) (1,080)
Proceeds from sale of property,
buildings, and equipment 1,121 95
Payments received on net investment in
direct financing leases 15 78
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Net cash used in investing activities ( 1,484) ( 907)
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FINANCING ACTIVITIES:
Repayments of long-term debt ( 17) ( 17)
Principal payments of
capital lease obligations ( 106) 55
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Net cash (used in) provided by
financing activities ( 123) 38
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NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS ( 532) 1,184
CASH AND TEMPORARY INVESTMENTS,
beginning of period $ 9,012 $ 5,507
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CASH AND TEMPORARY INVESTMENTS,
end of period $ 8,480 $ 6,691
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 5,221 $ 277
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Income taxes $ 551 $ 483
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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. NATURE OF BUSINESS AND SUMMARY OF SIGNFICANT 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 (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.
Property, Buildings, and Equipment --
Expenditures which materially increase useful lives are capitalized, whereas
ordinary maintenance and repairs are expensed as incurred. Depreciation of
fixed assets is computed using the straight-line method for financial
reporting purposes and accelerated methods for tax purposes over the estimated
useful lives of the related assets as follows:
Buildings and improvements 10-39 years
Equipment 3-10 years
Leaseholds Life of lease up to 20 years
Long-lived assets --
The Company periodically evaluates the carrying value of long-lived assets
to be held and used when events or changes in circumstances warrant such a
review. The carrying value of a long-lived asset is considered impaired
when the projected undiscounted future cash flow of such asset is less than
its carrying value.
Intangibles --
The consolidated balance sheet includes the allocation of purchase accounting
goodwill of $49,910,000 and deferred financing costs of $5,604,000 at
April 4, 1999. 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 April 4, 1999 was $499,200 and $205,500,
respectively and for the three months ended March 29, 1998 was $494,900 and
$204,500, respectively. Accumulated amortization of goodwill at
April 4, 1999 and March 29, 1998 was $2,981,000 and $978,000, respectively.
Accumulated amortization of deferred financing costs at April 4, 1999 and
March 29, 1998 was $1,233,000 and $409,000, 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. At April 4, 1999, there were 110 franchise
or licensed restaurants of which 40 restaurants were operated under
multi-unit agreements. At March 29, 1998, there were 105 franchised or
licensed restaurants of which 35 restaurants were operated under
multi-unit agreements.
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.
2. 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 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 three months of 1998, the
Company realized a gain of $530,000 related to the receipt of life insurance
proceeds in excess of cash surrender value.
3. SUMMARIZED FINANCIAL INFORMATION - SUBSIDIARY GUARANTORS
The subsidiary guarantors are wholly owned and 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,
other than the non-guarantor subsidiaries which individually, and in the
aggregate, are inconsequential. 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 all of the Company's 10.25% senior Subordinated
Notes:
April 4, January 3,
1999 1999
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(in thousands)
Balance Sheet Data:
Current assets $ 644 $ 879
Noncurrent assets $1,313 $1,323
Current liabilities $ 807 $1,273
Non current liabilities $ 22 $ 31
For the three months ended
April 4, March 29,
1999 1998
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(in thousands)
Income Statement Data:
Net sales $1,356 $1,189
Gross profit $ 475 $ 352
Income before provision for Federal
and state income taxes $ 370 $ 238
Net income $ 230 $ 148
Item 2. Management's Discussion and Analysis of Financial
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Condition and Results of Operations
-----------------------------------
Comparison of the Three Months Ended April 4, 1999
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to the Three Months Ended March 29, 1998
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CASH OPERATING PROFIT
---------------------
Cash operating profit (net income before interest, taxes, depreciation and
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 April 4, 1999 increased
$1.6 million to $6.8 million (10.45% of revenues) compared to $5.2 million
(8.79% of revenues) in the same period in 1998. The 30.77% increase in cash
operating profit is primarily attributable to an increase in restaurant sales
generated by the introduction of new products and promotional menu items in
the restaurants and a reduction in overall operating costs of the Company as
a percentage of sales.
The following table reflects certain key operating statistics which impact the
Company's financial results:
KEY OPERATING STATISTICS
(Dollars in thousands except average check)
For the three months ended
--------------------------
April 4, March 29,
1999 1998
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SYSTEMWIDE RESTAURANT SALES $83,713 $75,228
Percent change 11.28%
COMPANY RESTAURANT STATISTICS:
Number of restaurants 241 245
Restaurant Sales $63,248 $57,478
Percent change 10.04%
Same restaurant sales $61,885 $56,187
Percent change 10.14%
Customer count per day 686 663
Percent change 3.47%
Average check $ 4.18 $ 3.84
Percent change 8.85%
Selected components are --
Cost of restaurant sales $51,604 $47,712
As a percent of restaurant sales 81.59% 83.01%
Food and paper cost $19,357 $17,736
As a percent of restaurant sales 30.60% 30.86%
Direct labor $14,519 $13,405
As a percent of restaurant sales 22.96% 23.32%
Other labor costs $ 4,421 $ 4,533
As a percent of restaurant sales 6.99% 7.89%
FRANCHISE SYSTEM STATISTICS:
Number of restaurants 110 105
Restaurant Sales $20,465 $17,750
Percent change 15.29%
Same restaurant sales $17,980 $16,376
Percent change 9.80%
Customer count per day 475 467
Percent change 1.71%
Average check $ 4.31 $ 4.08
Percent change 5.64%
RESULTS OF OPERATIONS
---------------------
Total Krystal system (Company and Franchise combined) restaurant sales for the
three months ended April 4, 1999 increased 11.28% to $83.7 million compared to
$75.2 million for the three months ended March 29, 1998.
Total Company revenues increased 10.10% to $65.6 million for the three months
ended April 4, 1999 compared to $59.6 million for the three months ended
March 29, 1998. Restaurant sales accounted for $5.8 million of the
$6.0 million increase. The balance of the increase resulted from a net
increase in franchise fees and royalties of approximately $85,000, and
increased revenue from the Company's aviation subsidiary of approximately
$167,000. Company-owned same restaurant sales for three months ended
April 4, 1999 were $61,885 compared to $56,187 for the same period of 1998,
an increase of 10.14%. The increase in restaurant sales resulted primarily
from the introduction of new products, product price increases, new promotional
programs, reduced price discounting and continuing improvements in operations
at the restaurant level, each of which contributed to an increase in the
average customer check and customer counts per restaurant day. The
Company had 241 restaurants open at April 4, 1999 compared to 245 at the end
of the first quarter of 1998.
The average customer check for Company-owned restaurants in the first quarter
of 1999 was $4.18 as compared to $3.84 in the first quarter of 1998, an
increase of 8.85%. The increase in average customer check was due primarily
to product price increases of approximately 2.10% in the first three months
of 1999 over the first three months of 1998, and a movement in the mix of
products sold toward higher priced product offerings such as the Krystal
Chik and the new Sackful offering. Menu prices for the Krystal Chik and
Sackfuls (sacks of eight and twelve Krystal hamburgers) are higher than
other favorite Krystal sandwiches or combos and therefore contributed
to an increase in the amount of the average customer check. During the
first quarter of 1999, Krystal Chiks accounted for $7.8 million, or 12.2%
and Sackfuls accounted for $7.7 million, or 12.1% of restaurant sales,
respectively. Customer counts per restaurant day increased to 686 in the
three months ended April 4, 1999 compared to 663 in the same period of 1998,
an increase of 3.47%.
The Company's franchisees opened no franchised restaurants in the three months
ended April 4, 1999 compared to six opened in the same period of 1998. The
Company recognizes franchisee fee income when the franchise restaurant opens,
therefore no franchisee fee income was recorded in the three months ended
April 4, 1999 compared to $127,000 recorded in the three months ended
March 29, 1998. Royalties increased 25.51% to $1.0 million in the first
quarter of 1999 from $831,000 in the first quarter of 1998. The increase in
royalties was primarily due to an 4.76% increase in franchise restaurants,
a 9.80% increase in franchise same restaurant sales in the three months ended
April 4, 1999 compared to the same period in 1998 and $79,000 in royalties
from the sale of frozen Krystals. Royalties from the sale of frozen Krystals
were negligible in the first quarter of 1998. The franchise system operated
110 restaurants at the end of the first three months of 1999 compared to 105
at the end of the same period of 1998.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, was $1.4 million in the three months ended April 4, 1999 compared
to $1.2 million in the same period of 1998, a 14.05% increase.
Cost of restaurant sales was $51.6 million in the first three months of 1999
compared to $47.7 million in the same period of 1998. Cost of restaurant
sales as a percentage of restaurant sales decreased to 81.59% in the first
three months of 1999 from 83.01% in the first three months of 1998. This
decrease resulted primarily from a decrease in food and paper costs as a
percent of restaurant sales to 30.60% in the first quarter of 1999 compared to
30.86% in the same period of 1998 and a decrease in direct labor as a
percentage of restaurants sales at 22.96% in the first quarter of 1999 from
23.32% in the same period of 1998. The decrease in food and paper cost as a
percentage of restaurant sales resulted from increased sales of higher gross
margin items, such as Sackfuls, and the elimination from the menu of certain
lower gross margin items such as the Burger Plus sandwich, the Big K sandwich
and the large chicken sandwich. This decrease was also influenced by the 2.1%
sales price increase. The improvement in labor as a percent of restaurant
sales resulted from increased management focus on labor efficiency and
operating leverage achieved through higher same store sales volumes. Other
labor, which includes restaurant General Managers' and Assistant Managers'
labor costs, as a percentage of restaurant sales decreased from 7.89% to 6.99%
during the first quarter of 1999 compared to the same period in 1998. General
Managers' and Assistant Managers' labor cost was effected primarily by the
number of operating restaurants rather than sales volumes, and therefore tends
to drop as a percentage of restaurant sales when revenues increase.
Depreciation and amortization expenses decreased $57,000, or less than 2.00%,
to $3.2 million in the first three months of 1999 compared to the first
three months of 1998.
General and administrative expenses increased $514,000, or 8.74%, to $6.4
million in the first three months ended April 4, 1999 compared to $5.9 million
in the same period of 1998. The increase in general and administrative
expenses resulted primarily from increases in expenditures related to
corporate office activities and increased sales. The largest contributor to
the increase in general and administrative expenses was advertising expense
which increased $200,000, or 8.22%, to $2.6 million in the first three months
of 1999 compared to $2.4 million in the same period of 1998. Advertising
expense as a percentage of restaurant sales was 4.10% in the first three
months of 1999 as compared to 4.17% for the same period of 1998.
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 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 three months of 1998 the Company
realized a gain of $530,000 related to receipt of life insurance proceeds in
excess of cash surrender value. No such transactions occurred in the first
quarter of 1999.
Interest expense, net of interest income, decreased $276,000 from $2.8 million
to $2.5 million in the first quarter of 1999 as compared to the first quarter
of 1998. This decrease resulted primarily from a decrease of $11 million in
average debt during the same period.
The Company's provision for income taxes increased $240,000, or 5.7% to
$662,000 for the first quarter of 1999 as compared to $422,000 for the same
period of 1998. The effective income tax rate was 58% for the first quarter
of 1999 as compared to 65% for the same period in 1998. The effective tax
rate was more than the statutory income tax rate primarily because of the
non-deductible portion of amortization expense associated with acquisition-
related goodwill.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company does not maintain significant inventory or accounts receivables
since substantially all of its restaurants' sales are for cash, however,
the Company closely monitors receivables from franchisees. The Company
typically receives several weeks of trade credit in purchasing food and
supplies which is standard in the restaurant business. The Company
normally operates with working capital deficits (current liabilities exceeding
current assets) and had a working capital deficit of $8.5 million at
April 4, 1999, compared to a working capital deficit of $11.1 million at
January 4, 1999.
Capital expenditures totaled approximately $2.6 million in the first three
months of 1999 as compared to $1.1 million for the same period in 1998. The
Company opened two new restaurants during the first three months of 1999 and
opened none during the same period in 1998. Management estimates that capital
expenditures will be approximately $23.4 million during the remainder of 1999.
Capital expenditures for the current year are expected to include the
construction and/or land acquisition for up to 15 additional restaurants to
open in 1999, the acquisition of land for restaurants to open in 2000, the
refurbishment of certain restaurants, ongoing capital improvements and the
conversion of restaurant computer systems. The Company expects the cost
associated with Year 2000 compliance will be approximately $7.3 million in
fiscal 1999.
In December 1998, the Company obtained a sales/leaseback commitment with a
firm for up to $6.0 million of properties which are to be developed and
operated as Company-owned Krystal restaurants. The primary term of
leases under this arrangement is 15 years, with two successive five year
renewal options. In the quarter ended April 4, 1999, the Company completed
a sale/leaseback transaction for a restaurant for a sale price of
approximately $985,000.
At April 4, 1999, the Company had available cash of approximately
$8.5 million, receivables of $1.1 million, and $21.4 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.
YEAR 2000
---------
Much of the computer software and, in certain cases, hardware in use today
is not equipped to distinguish the year 2000 from the year 1900. Much of the
software used today was designed with only two digits available for
indicating the current year. This issue, at its fundamental level,
threatens the integrity of date sensitive financial and other information that
is produced by an organization's computer systems, and could undermine
the organization's ability to accurately report financial and other date
sensitive information.
The Company has established a Year 2000 strategic plan which adopts a series
of initiatives necessary to upgrade the Company's computer systems and to
minimize the impact of failures of other computer systems to process date-
sensitive information after December 31, 1999. All mission critical systems
are currently in the validation phase of the Year 2000 plan. The Company
expects all critical systems to be Year 2000 compliant before
December 31, l999.
A portion of the plan involves replacement of the Company's hardware
and software environment used to run application software, including the
Company's centralized financial systems. The cost of this replacement was
approximately $2.1 million, and was completed in 1998. For each Company
restaurant location, new restaurant reporting and management systems are
scheduled for installation by October 1999, including upgrading of software
and selected hardware and telecommunication systems to bring restaurant
systems into Year 2000 compliance. This cost is estimated to be approximately
$7.3 million in 1999 and is included in the Company's 1999 capital budget.
With respect to vendor and third party associations, the plan includes a
survey of the systems and products provided by third parties, and includes
contacting vendors or third-parties to gain knowledge of the status of their
Year 2000 compliance. Currently all items in this area are in the validation
process. Based on information received by the Company, these vendors and third
parties are at various stages of completion of their Year 2000 compliance
plans, and all major suppliers have reported that they expect to be in full
compliance by the end of 1999 calendar year.
Management believes its approach to the Year 2000 issue to be comprehensive,
and does not expect the Year 2000 issue to have a material adverse impact on
its results of operations or financial condition. Accordingly, the Company
has not developed a contingency plan, and does not intend to do so. However,
given the nature of the problem and the number of factors outside the
Company's direct control, management is continuously evaluating the risks
associated with the Year 2000 and cannot guarantee Year 2000 compliance. If
for any reason, critical suppliers are unable to resolve their Year 2000
issues in a timely manner, the Company's business could be adversely affected.
Specifically, the lack of Year 2000 readiness by suppliers could affect the
availability and expected cost of food products and other supplies used by the
Company and, consequently, the Company's restaurant operations.
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 first quarter
of 1999.
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: 05/03/99 /s/Larry D. Bentley
- --------------- ------------------------
Larry D. Bentley
(Vice President and Chief Financial
and Accounting Officer)