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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or the quarterly period ended September 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from to
--------- --------
Commission file number 0-20040
---------------------------------
THE KRYSTAL COMPANY
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TENNESSEE 62-0264140
--------- ----------
(State or other jurisdiction of (IRS Employer identification
incorporation or organization) Number)
One Union Square, Chattanooga, TN 37402
- -----------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(423) 757-1550
- -----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
---- ----
This report is filed by the Company pursuant to Section 15(d) of the Securities
Exchange Act of 1934. The Company has 100 shares of common stock outstanding
held of record by Port Royal Holdings, Inc. as of November 8, 2002.
THE KRYSTAL COMPANY
-------------------
SEPTEMBER 29, 2002
------------------
PART I. FINANCIAL INFORMATION
------------------------------
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the Company's latest annual
report on Form 10-K.
In the opinion of management of the Company, all normal and recurring
adjustments necessary to present fairly (1) the financial position of The
Krystal Company and Subsidiary as of September 29, 2002 and December 30, 2001,
and (2) their change in shareholder's equity for the nine months ending
September 29, 2002 and (3) the results of their operations for the three and
nine months ended September 29, 2002 and September 30, 2001 and (4) their cash
flows for the nine months ended September 29, 2002 and September 30, 2001 have
been included. The results of operations for the interim period ended
September 29, 2002 are not necessarily indicative of the results for the full
year.
Certain written and oral statements made by or on behalf of the Company may
constitute "forward-looking" statements as defined under the Private
Securities Litigation Reform Act of 1995 (the "PSLRA"). The PSLRA contains a
safe harbor in making such disclosures. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from the Company's historical experience and its present
expectations or projections. These risks and uncertainties include, but are
not limited to, unanticipated economic changes, interest rate movements,
changes in governmental policies, the impact of competition, changes in
consumer tastes, increases in costs for food and/or labor, the availability
and adequate supply of hourly-paid employees, the ability of the Company to
attract and retain suitable franchisees, the Company's ability to obtain
funding sufficient to meet operational requirements and capital expenditures
and the impact of governmental regulations. The Company cautions that such
factors are not exclusive. Caution should be taken not to place undue reliance
on any such forward-looking statements since such statements speak only as of
the date of the making of such statements and are based on certain expectations
and estimates of the Company which are subject to risks and changes in
circumstances that are not within the Company's control. The Company does
not undertake to update forward-looking statements other than as required by
law. The information provided herein should be read in conjunction with
information provided in the Company's Form 10-K for the fiscal year ended
December 30, 2001.
PART I. FINANCIAL INFORMATION
-----------------------------
Item I. Financial Statements
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
September 29, December 30,
2002 2001
--------- ----------
ASSETS (Unaudited)
- ------
CURRENT ASSETS:
Cash and temporary investments $ 8,566 $ 13,042
Receivables, net 1,590 1,418
Inventories 1,649 2,033
Deferred income taxes 2,877 2,877
Prepayments and other 1,003 823
-------- --------
Total current assets 15,685 20,193
-------- --------
PROPERTY, BUILDINGS, AND EQUIPMENT, net 94,595 112,498
-------- --------
LEASED PROPERTIES, net 5,722 9,144
-------- --------
OTHER ASSETS:
Goodwill, net 37,968 37,968
Prepaid pension asset 8,284 8,754
Deferred financing costs, net 2,281 2,735
Other 1,021 1,605
Non-current assets held for sale 4,977 5,093
-------- --------
Total other assets 54,531 56,155
-------- --------
TOTAL ASSETS $170,533 $197,990
======== ========
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
(In thousands)
September 29, December 30,
2002 2001
LIABILITIES AND SHAREHOLDER'S EQUITY ----------- ----------
- ------------------------------------ (Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 3,826 $ 5,175
Accrued liabilities 26,799 22,719
Current portion of long-term debt 1,480 1,361
Current portion of capital
lease obligations 1,179 2,133
-------- --------
Total current liabilities 33,284 31,388
-------- --------
LONG-TERM DEBT, excluding current portion 83,451 118,581
-------- --------
CAPITAL LEASE OBLIGATIONS, excluding
current portion 5,551 8,170
-------- --------
DEFERRED INCOME TAXES 7,364 8,912
-------- --------
OTHER LONG-TERM LIABILITIES 5,459 1,501
-------- --------
SHAREHOLDER'S EQUITY:
Common stock, without par value;
100 shares authorized, issued
and outstanding, at September 29, 2002,
and at December 30, 2001 35,000 35,000
Retained earnings (deficit) 424 ( 5,562)
-------- --------
Total shareholder's equity 35,424 29,438
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $170,533 $197,990
======== ========
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands) (Unaudited)
For The Three For The Nine
Months Ended Months Ended
-------------------- --------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
-------- -------- -------- --------
REVENUES:
Restaurant sales $ 61,555 $ 61,703 $185,492 $184,311
Franchise fees 257 173 854 676
Royalties 1,683 1,541 5,023 4,377
------- ------- ------- --------
63,495 63,417 191,369 189,364
------- ------- ------- --------
COST AND OTHER EXPENSES:
Cost of restaurant sales 50,600 52,085 151,297 156,322
Advertising expense 2,586 2,591 7,791 7,741
Depreciation and amortization
expenses 2,747 3,542 8,192 10,652
General and administrative
expenses 4,548 3,865 13,448 11,277
Other expenses, net 376 200 129 ( 58)
------- ------- ------- --------
60,857 62,283 180,857 185,934
------- ------- ------- --------
OPERATING INCOME 2,638 1,134 10,512 3,430
GAIN (LOSS) ON SALE OF ASSETS ( 69) ( 48) ( 69) 548
INTEREST EXPENSE, net (2,303) (3,184) (7,205) ( 9,747)
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM 266 (2,098) 3,238 ( 5,769)
(PROVISION FOR) BENEFIT FROM INCOME TAXES ( 63) 656 ( 854) 1,769
------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM 203 (1,442) 2,384 ( 4,000)
INCOME FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES OF $414 IN 2002 244 210 716 668
EXTRAORDINARY ITEM:
Gain on early retirement of debt, net
of applicable income tax expense of
$1,769 in 2002 174 -- 2,886 --
------- ------- ------- -------
Net income (loss) $ 621 $ (1,232) $ 5,986 $( 3,332)
======= ======= ======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
-----------------------------------------------
FOR THE NINE MONTHS ENDED
-------------------------
September 29, 2002
------------------
(In thousands)
(Unaudited)
Retained
Common Earnings
Stock (Deficit)
-------- --------
BALANCE, December 30, 2001 $35,000 $( 5,562)
Net income -- 5,986
------- -------
BALANCE, September 29, 2002 $35,000 $ 424
======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(Unaudited)
For The Nine Months Ended
---------------------------
Sept. 29, Sept. 30,
2002 2001
--------- ---------
OPERATING ACTIVITIES:
Net income (loss) $ 5,986 $ (3,332)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities-
Depreciation and amortization 8,332 10,884
Change in deferred taxes ( 1,441) ( 120)
Gain on early retirement of debt ( 4,655) --
(Gain) loss on sale of assets 58 ( 548)
Loss on impairment of assets 496 345
Changes in operating assets and liabilities:
Receivables, net ( 172) 140
Inventories 384 3
Prepayments and other ( 180) ( 166)
Accounts payable ( 1,349) ( 4,187)
Accrued liabilities 3,973 ( 612)
Other, net 1,410 729
-------- --------
Net cash provided by operating activities 12,842 3,136
-------- --------
INVESTING ACTIVITIES:
Additions to property, buildings,
and equipment ( 7,118) ( 4,801)
Proceeds from sale of property,
buildings, and equipment 23,729 2,224
-------- -------
Net cash provided by (used in)
investing activities 16,611 ( 2,577)
-------- -------
FINANCING ACTIVITIES:
Net borrowings under revolving
credit facility ( 4,979) 254
Repayments of long-term debt (25,377) ( 120)
Outstanding checks in excess of
bank balance -- 202
Principal payments of
capital lease obligations ( 3,573) ( 1,486)
-------- -------
Net cash used in financing activities (33,929) ( 1,150)
-------- --------
NET DECREASE IN CASH AND
TEMPORARY INVESTMENTS ( 4,476) ( 591)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 13,042 4,979
--------- -------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 8,566 4,388
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 5,991 $ 6,587
======= =======
Income taxes $ 2,248 $ 97
======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activities --
The Krystal Company (a Tennessee corporation) ("Krystal") is engaged primarily
in the development, operation and franchising of quick-service restaurants in
the southeastern United States. Until its assets were sold on
October 17, 2002, Krystal's wholly-owned subsidiary, Krystal Aviation Co.
("Aviation"), operated a fixed base airport hangar operation in
Chattanooga, Tennessee. Aviation's revenues provide less than 3% of the
Company's total revenues.
Sale of Aviation--
On September 2, 2002, the Company entered into a letter of intent with Truman
Arnold Companies for the sale of substantially all of the assets of the
Company's fixed base operation in Chattanooga, Tennessee. The sale was
finalized on October 17, 2002 for a sale price of $10,786,000 and resulted in
a gain on the sale of $2,127,000, net of tax.
The assets of Aviation which were sold subsequent to September 29, 2002 are
classified as assets held for sale in the accompanying balance sheets. In
addition the operating results of Aviation for all periods presented are
classified as discontinued operations.
Principles of Consolidation --
The accompanying consolidated financial statements include the accounts of
Krystal and Aviation (hereinafter referred to collectively as "the Company").
All significant intercompany balances and transactions have been eliminated.
Cash and temporary investments --
The Company considers repurchase agreements and other temporary cash
investments with a maturity of three months or less to be temporary
investments.
Inventories --
Inventories are stated at cost and consist primarily of food, paper products
and other supplies.
Property, Buildings, and Equipment --
Property, buildings and equipment are stated at cost. Expenditures which
materially increase useful lives are capitalized, whereas ordinary
maintenance and repairs are expensed as incurred. Depreciation of fixed
assets is computed using the straight-line method for financial reporting
purposes and accelerated methods for tax purposes over the estimated useful
lives of the related assets as follows:
Buildings and improvements 10-39 years
Equipment 3-10 years
Leaseholds Life of lease up to 20 years
Long-lived assets --
The Company periodically evaluates the carrying value of long-lived assets
when events or changes in circumstances warrant such a review. When an asset
is determined to be impaired, its carrying value is reduced and a charge is
recognized in the Consolidated Statement of Operations. During the third
quarter of 2002 and 2001, the Company recorded an impairment charge of
$496,000 and $345,000, respectively, related to the impairment of property
and equipment at underperforming stores.
Leased property --
The lower of fair market value or the discounted value of that portion of a
capital lease attributable to building costs is capitalized and amortized by
the straight-line method over the term of such leases and included with
depreciation expense. The portions of such leases relating to land are
accounted for as operating leases.
Intangibles --
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets" (collectively the "Standards"). The Standards are
effective for fiscal years beginning after December 15, 2001. SFAS No. 141
requires companies to recognize acquired identifiable intangible assets
separately from goodwill if certain conditions are met. The Standards
require the value of separately identifiable intangible assets to be measured
at fair value. SFAS No. 142 requires that goodwill not be amortized, but
that amounts recorded as goodwill be periodically tested for value impairment.
Upon adoption of SFAS No. 142, if the value of goodwill is determined to be
impaired, the Company is required to reduce goodwill through a charge to
earnings. The Company adopted the Standards effective December 31, 2001.
The adoption of the Standards has the effect of eliminating the amortization
of goodwill. Based on an independent valuation of the Company as of
December 31, 2001, the Company has determined there is no impairment of its
goodwill asset as of that date.
Prior to the adoption of SFAS 142, the Company amortized goodwill over 25
years. Had the Company accounted for goodwill consistent with the
provisions of SFAS 142 in prior periods, the Company's loss from continuing
operations would have been affected as follows (in thousands):
For the Three For the Nine
Months Ended Months Ended
------------------ ------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
-------- ------- -------- -------
Income (loss) from
continuing operations $ 203 $(1,442) $2,384 $(4,000)
Add back: Goodwill amortization -0- 492 -0- 1,476
------ ------- ------ -------
Adjusted income (loss) from
continuing operations $ 203 $( 950) $2,384 $(2,524)
====== ======= ====== =======
The consolidated balance sheet includes deferred financing costs of $5,778,700
at September 29, 2002. Deferred financing costs are amortized over the life
of the debt agreement. The financing costs related to the Senior Notes are
amortized over 10 years. The financing costs associated with the Company's
Credit Facility are being amortized in part through May 2004 and in part
through January 2007. Amortization expense for deferred financing costs for
the three months ended September 29, 2002 was $154,700 and for the three
months ended September 30, 2001 was $135,900. Amortization expense for
deferred financing costs for the nine months ended September 29, 2002 was
$507,600 and for the nine months ended September 30, 2002 was $407,600.
Accumulated amortization of deferred financing costs at September 29, 2002
and September 30, 2001 was $3,498,100 and $2,914,100, 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 September 29, 2002, there were 177
franchised or licensed restaurants and at September 30, 2001, there were 155
franchised or licensed restaurants.
Franchisees and licensees are required to pay the Company an initial franchise
or license fee plus a weekly royalty and service fee of either 4.5% or 6.0%
of the restaurants' gross receipts, depending on the duration of the
franchise agreement. The initial franchise and license fees are recorded as
income as related restaurants begin operations. Royalty and service fees,
which are based on restaurant sales of franchisees and licensees, are
recognized as earned. Franchise fees received prior to the opening of the
restaurant are deferred and included in accrued liabilities on the consolidated
balance sheets. At September 29, 2002 and September 30, 2001, total deferred
franchise and license fees were approximately $958,500 and $1,050,000,
respectively.
Fair Market Value of Financial Instruments --
Unless otherwise indicated elsewhere in the notes to the consolidated financial
statements, the carrying values of the Company's financial instruments
approximate their fair values.
Benefit Plans --
The determination of obligations and expenses under the Company's retirement
and post retirement benefit plans is dependent on the selection of certain
assumptions used by actuaries in calculating such amounts. In accordance
with generally accepted accounting principles, actual results that differ
from assumptions are accumulated and amortized over future periods and
therefore, generally affect our recognized expense and the recorded
obligation in such periods. Significant differences in actual experience or
significant changes in the assumptions used may materially affect the pension
and post retirement obligations and future expenses.
Use of Estimates --
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications--
Certain reclassifications have been made to prior year financial statements
to conform with the 2002 presentation.
Income Taxes --
During the second quarter of 2002, the Company revised its estimate of certain
tax liability contingencies resulting in a reduction of income tax expense
of $200,000.
New Accounting Pronouncements --
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," referred to herein as SFAS 145.
SFAS 145 rescinds Statement of Financial Accounting Standards No. 4,
"Reporting Gains and Losses from Extinguishment of Debt" ("SFAS 4"), which
required all gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of the related
income tax effect. As a result, the criteria in Accounting Principles Board
Opinion No. 30 will now be used to classify those gains and losses. The
provisions of SFAS 145 are effective for financial statements issued for
fiscal years beginning after May 15, 2002, and interim periods within those
fiscal years. During the first, second and third quarters of 2002, prior to
the required adoption of SFAS 145, the Company reported extraordinary charges
aggregating $2,886,000 associated with the extinguishment of the Company's
debt. Under SFAS 145, any gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods that does not meet the
criteria in APB 30 for classification as an extraordinary item shall be
reclassified. The Company plans to adopt SFAS 145 on January 1, 2003.
Accordingly, in financial reporting periods after adoption, the extraordinary
charges reported in the first, second, and third quarters of 2002 will be
reclassified.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" ("Issue 94-3"). SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost as
generally defined in Issue 94-3 was recognized at the date of an entity's
commitment to an exit plan. The provisions of SFAS 146 are effective for exit
or disposal activities that are initiated after December 31, 2002, with early
application encouraged. Adoption of SFAS 146 is not expected to have a
material impact on the Company's financial statements.
2. SUMMARIZED FINANCIAL INFORMATION - SUBSIDIARY GUARANTORS
The Company's subsidiaries have fully and unconditionally guaranteed the
Notes (See Note 4) of the Company. The guarantees do not restrict the ability
of the subsidiary guarantors to declare dividends, or make loans or advances
to the Company.
As discussed in Note 1, on September 2, 2002, the Company entered into a
letter of intent with Truman Arnold Companies for the sale of substantially
all of the assets of the Company's fixed base operation in Chattanooga,
Tennessee. The assets of Aviation which were sold subsequent to
September 29, 2002 are classified as assets held for sale in the accompanying
balance sheets and the results of operations for Aviation are classified as
discontinued operations in the accompanying statements of operations.
Set forth below are condensed consolidating financial statements for the
Company and the Subsidiary Guarantors as of September 29, 2002 and
December 30, 2001 and for the nine months ended September 29, 2002 and
September 30, 2001. The equity method has been used by the Company with
respect to investments in subsidiaries.
CONDENSED CONSOLIDATING BALANCE SHEET
At September 29, 2002 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
----------- ---------- ----------- -----------
Current Assets:
Cash and temporary investments $ 8,271 $ 295 $ -- $ 8,566
Receivables, net (11,653) 404 12,839 1,590
Inventories 1,593 56 -- 1,649
Deferred income taxes 2,876 1 -- 2,877
Prepayments and other 995 8 -- 1,003
-------- ------- ------- --------
Total current assets 2,082 764 12,839 15,685
-------- ------- ------- --------
Property, buildings, and equipment 130,380 2,583 -- 132,963
Accumulated depreciation (37,792) ( 576) -- ( 38,368)
-------- ------- ------- --------
Net property, buildings, and equipment 92,588 2,007 -- 94,595
-------- ------- ------- --------
Leased Properties, net 5,722 -- -- 5,722
-------- ------- ------- --------
Investment in Subsidiary 1 1 (2) --
-------- ------- ------- --------
Other Assets:
Goodwill, net 37,968 -- -- 37,968
Prepaid pension asset 8,284 -- -- 8,284
Deferred financing costs, net 2,281 -- -- 2,281
Other 1,006 15 1,021
Non-current assets held for sale -- 4,977 -- 4,977
-------- ------- ------- --------
Total other assets 49,539 4,992 -- 54,531
-------- ------- ------- --------
Total Assets $149,932 $ 7,764 $12,837 $170,533
======== ======= ======= ========
Current Liabilities:
Accounts payable $(10,419) $ 1,406 $12,839 $ 3,826
Accrued liabilities 26,260 539 -- 26,799
Current portion of long-term debt 1,250 230 -- 1,480
Current portion of capital lease
obligations 1,179 -- -- 1,179
-------- ------- ------- --------
Total current liabilities 18,270 2,175 12,839 33,284
-------- ------- ------- --------
Long Term Debt, excluding current
portion 82,001 1,450 -- 83,451
-------- ------- ------- --------
Capital Lease Obligations, excluding
current portion 5,551 -- -- 5,551
-------- ------- ------- --------
Deferred Income Taxes 7,487 ( 123) -- 7,364
-------- ------- ------- --------
Other Long-Term Liabilities 5,459 -- -- 5,459
-------- ------- ------- --------
Shareholder's Equity:
Common Stock 35,000 2 (2) 35,000
Retained Earnings (deficit) (3,836) 4,260 -- 424
-------- ------- ------- --------
Total shareholder's equity 31,164 4,262 (2) 35,424
-------- ------- ------- --------
Total Liabilities and Shareholder's
Equity $149,932 $ 7,764 $12,837 $170,533
======== ======= ======= ========
CONDENSED CONSOLIDATING BALANCE SHEET
At December 30, 2001
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
---------- ---------- ----------- -----------
Current Assets:
Cash and temporary investments $ 12,965 $ 77 $ -- $ 13,042
Receivables, net ( 8,943) 234 10,127 1,418
Inventories 1,971 62 -- 2,033
Deferred income taxes 2,876 1 -- 2,877
Prepayments and other 756 67 -- 823
-------- ------- ------- --------
Total current assets 9,625 441 10,127 20,193
-------- ------- ------- --------
Property, Buildings, and Equipment 144,654 2,560 147,214
Accumulated depreciation (34,289) ( 427) (34,716)
-------- ------- ------- --------
Net property, buildings, and equipment 110,365 2,133 -- 112,498
-------- ------- ------- --------
Leased Properties, net 9,144 -- -- 9,144
-------- ------- ------- --------
Investment in Subsidiary 1 1 (2) --
-------- ------- ------- --------
Other Assets:
Goodwill, net 37,968 -- -- 37,968
Prepaid pension asset 8,754 -- -- 8,754
Deferred financing costs, net 2,735 -- -- 2,735
Other 1,588 17 -- 1,605
Non-current assets held for sale -- 5,093 -- 5,093
-------- ------- ------- --------
Total other assets 51,045 5,110 -- 56,155
-------- ------- ------- --------
Total Assets $180,180 $ 7,685 $10,125 $197,990
======== ======= ======= ========
Current Liabilities:
Accounts payable $( 6,795) $ 1,843 $10,127 $ 5,175
Accrued liabilities 22,339 380 -- 22,719
Current portion of long-term debt 1,138 223 -- 1,361
Current portion of capital lease
obligations 2,133 -- -- 2,133
-------- ------- ------- --------
Total current liabilities 18,815 2,446 10,127 31,388
-------- ------- ------- --------
Long Term Debt, excluding current
portion 116,957 1,624 -- 118,581
-------- ------- ------- --------
Capital Lease Obligations, excluding
current portion 8,170 -- -- 8,170
-------- ------- ------- --------
Deferred Income Taxes 8,928 ( 16) -- 8,912
-------- ------- ------- --------
Other Long-Term Liabilities 1,501 -- -- 1,501
-------- ------- ------- --------
Shareholder's Equity:
Common Stock 35,000 2 (2) 35,000
Retained Earnings ( 9,191) 3,629 -- ( 5,562)
-------- ------- ------- --------
Total shareholder's equity 25,809 3,631 (2) 29,438
-------- ------- ------- --------
Total Liabilities and Shareholder's
Equity $180,180 $ 7,685 $10,125 $197,990
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the nine months ended September 29, 2002 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
Revenues:
Restaurant sales $185,492 $ -- $ -- $185,492
Franchise fees 854 -- -- 854
Royalties 5,023 -- -- 5,023
-------- ------- ------- --------
Total revenues 191,369 -- -- 191,369
-------- ------- ------- --------
Cost and Expenses:
Cost of restaurant sales 151,297 -- -- 151,297
Advertising expense 7,791 -- -- 7,791
Depreciation and amortization
expense 8,043 149 -- 8,192
General and administrative
expenses 13,521 ( 73) -- 13,448
Other expenses, net 129 -- -- 129
-------- ------- ------- --------
Total operating expenses 180,781 76 -- 180,857
-------- ------- ------- --------
Operating income 10,588 ( 76) -- 10,512
Loss on sale of assets ( 69) -- -- ( 69)
Interest expense, net (7,147) ( 58) -- ( 7,205)
-------- ------- ------- --------
Income (loss) before income taxes
and extraordinary item 3,372 ( 134) -- 3,238
(Provision for) benefit
from income taxes ( 903) 49 -- ( 854)
-------- ------- ------- --------
Income (loss) from continuing operations
and extraordinary item 2,469 ( 85) -- 2,384
Income from discontinuing operations,
net of income taxes of $414 in 2002 -- 716 -- 716
Extraordinary item:
Gain on early retirement of debt, net
of applicable income tax expense
of $1,769 in 2002 2,886 -- -- 2,886
-------- ------- ------- --------
Net income $ 5,355 $ 631 $ -- $ 5,986
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the nine months ended September 30, 2001 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
Revenues:
Restaurant sales $184,311 $ -- $ -- $184,311
Franchise fees 676 -- -- 676
Royalties 4,377 -- -- 4,377
-------- ------- ------- --------
Total revenues 189,364 -- -- 189,364
-------- ------- ------- --------
Cost and expenses:
Cost of restaurant sales 156,322 -- -- 156,322
Advertising expense 7,741 -- -- 7,741
Depreciation and amortization
expense 10,504 148 -- 10,652
General and administrative
expenses 11,339 ( 62) -- 11,277
Other expenses, net ( 58) -- -- ( 58)
-------- ------- ------- --------
Total operating expenses 185,848 86 -- 185,934
-------- ------- ------- --------
Operating income 3,516 ( 86) -- 3,430
Gain on sale of assets 548 -- -- 548
Interest expense, net ( 9,638) ( 109) -- ( 9,747)
-------- ------- ------- --------
Loss before income taxes,
and extraordinary item ( 5,574) ( 195) -- ( 5,769)
Benefit from income taxes 1,694 75 -- 1,769
-------- ------- ------- --------
Loss from continuing operations
before extraordinary item ( 3,880) ( 120) -- ( 4,000)
Income from discontinuing operations -- 668 -- 668
-------- ------- ------- --------
Net income (loss) $( 3,880) $ 548 $ -- $( 3,332)
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 29, 2002 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- -------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,355 $ 631 $ -- $ 5,986
Adjustments to reconcile net income
to net cash provided by
operating activities -
Depreciation and amortization 8,043 289 -- 8,332
Change in deferred income taxes (1,441) -- -- (1,441)
Gain on early extinguishment of debt (4,655) -- -- (4,655)
(Gain) loss on sale of assets 69 ( 11) -- 58
Loss on impairment of assets 496 -- -- 496
Changes in operating assets and
liabilities:
Receivables, net ( 2) ( 170) -- ( 172)
Inventories 378 6 -- 384
Prepayments and other ( 239) 59 -- ( 180)
Accounts payable ( 912) ( 437) -- (1,349)
Accrued liabilities 3,921 52 -- 3,973
Other, net 1,408 2 -- 1,410
-------- -------- ------- -------
Net cash provided by
operating activities 12,421 421 -- 12,842
-------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment ( 7,071) ( 47) -- ( 7,118)
Proceeds from the sale property,
buildings and equipment 23,718 11 -- 23,729
-------- ------- -------- -------
Net cash provided by (used in)
investing activities 16,647 ( 36) -- 16,611
-------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under
revolving credit facility ( 4,979) -- -- ( 4,979)
Repayments of long-term debt (25,210) ( 167) -- (25,377)
Principal payments of capital
lease obligations ( 3,573) -- -- ( 3,573)
-------- ------- ------- -------
Net cash used in
financing activities (33,762) ( 167) -- (33,929)
-------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS ( 4,694) 218 -- ( 4,476)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 12,965 77 -- 13,042
-------- ------- ------- -------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 8,271 $ 295 $ -- $ 8,566
======== ======= ======= =======
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2001 (Unaudited)
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $( 3,880) $ 548 $ -- $( 3,332)
Adjustments to reconcile net
income (loss) to net cash used in
operating activities -
Depreciation and amortization 10,504 380 -- 10,884
Change in deferred income taxes ( 120) -- -- ( 120)
Gain on sale of assets ( 548) -- -- ( 548)
Loss on impairment of assets 345 -- -- 345
Changes in operating assets and
liabilities:
Receivables, net ( 90) 230 -- 140
Inventories 11 ( 8) -- 3
Prepayments and other ( 233) 67 -- ( 166)
Accounts payable ( 2,897) ( 1,290) -- ( 4,187)
Accrued liabilities ( 571) ( 41) -- ( 612)
Other, net 728 1 -- 729
-------- ------- ------- --------
Net cash used in
operating activities 3,249 ( 113) -- 3,136
-------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment ( 4,669) ( 132) -- ( 4,801)
Proceeds from the sale of property,
buildings and equipment 2,224 -- -- 2,224
-------- ------- ------- --------
Net cash used in investing
activities ( 2,445) ( 132) -- ( 2,577)
-------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under
revolving credit facility 254 -- -- 254
Repayments of long-term debt ( 5) ( 115) -- ( 120)
Outstanding checks in excess of
bank balance 202 -- -- 202
Principal payments of capital
lease obligations ( 1,486) -- -- ( 1,486)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities ( 1,035) ( 115) -- ( 1,150)
-------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS ( 231) ( 360) -- ( 591)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 4,554 425 -- 4,979
-------- -------- ------- --------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 4,323 $ 65 $ -- $ 4,388
======== ======== ======= ========
3. Segment Reporting
The Company has historically operated in three defined reportable segments:
restaurants, franchising, and fixed base airport hanger operations ("FBO").
The restaurant segment consists of the operations of all Company-owned
restaurants and derives its revenues from retail sales of food products to
the general public. The franchising segment consists of franchise sales and
support activities and derives its revenues from fees related to the sales of
franchise and development rights and collection of royalties from franchisees
of the Krystal brand. The FBO operation, which was sold subsequent to the end
of the third quarter and is now referred to as subsidiary held for sale,
consists primarily of aircraft fuel sales and the leasing of aircraft hanger
space. All of the Company's revenues are derived within the United States.
The accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies.
Segment information is as follows:
- ----------------------------------------------------------------------------
Sept. 29, Sept. 30,
(in thousands) 2002 2001
- ----------------------------------------------------------------------------
Revenues:
Restaurants $185,492 $184,311
Franchising 5,877 5,053
Discontinued operations 5,084 5,106
- ----------------------------------------------------------------------------
Total segment revenues $196,453 $194,470
============================================================================
Depreciation and Amortization
Restaurants $ 7,964 $ 10,426
Franchising 3 3
Discontinued operations 140 232
- ----------------------------------------------------------------------------
Total segment depreciation and amortization $ 8,107 $ 10,661
============================================================================
Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
Restaurant $ 14,098 $ 10,037
Franchising 4,166 3,580
Discontinued operations 1,257 1,304
- ----------------------------------------------------------------------------
Total segment EBITDA $ 19,521 $ 14,921
============================================================================
Sept. 29, December 30,
2002 2001
- -----------------------------------------------------------------------------
Capital Expenditures:
Restaurants $ 7,071 $ 5,665
Franchising 0 0
Discontinued operations 25 166
- -------------------------------------------------------------------------------
Total segment capital expenditures $ 7,096 $ 5,831
===============================================================================
Total Assets:
Restaurants $159,208 $186,904
Franchising 1,959 1,718
Assets held for sale 5,739 5,513
- -------------------------------------------------------------------------------
Total segment assets $166,906 $194,135
===============================================================================
A reconciliation of segment depreciation and amortization to consolidated
depreciation and amortization is as follows:
- -------------------------------------------------------------------------------
Sept. 29, Sept. 30,
2002 2001
- -------------------------------------------------------------------------------
Segment depreciation and amortization $ 8,107 $ 10,661
Unreported segments (1) 225 223
- -------------------------------------------------------------------------------
Total consolidated depreciation and amortization $ 8,332 $ 10,884
===============================================================================
A reconciliation of segment EBITDA to
consolidated EBITDA is as follows:
Segment EBITDA $ 19,521 $ 14,921
Unreported segments (1) 440 465
- -------------------------------------------------------------------------------
Total consolidated EBITDA $ 19,961 $ 15,386
===============================================================================
A reconciliation of segment total assets to consolidated total assets is as
follows:
- -------------------------------------------------------------------------------
Sept. 29, Dec. 30,
2002 2001
- -------------------------------------------------------------------------------
Total segment assets $166,906 $194,135
Unreported segments (1) 3,627 3,855
- -------------------------------------------------------------------------------
Total consolidated assets $170,533 $197,990
===============================================================================
(1) Unreported segments do not meet the quantitative thresholds for segment
reporting.
4. INDEBTEDNESS
Senior Secured Credit Agreement--
0n January 28, 2002, the Company entered into a $25.0 million credit agreement
(the "Credit Facility"). The Credit Facility provides for $10.0 million in
revolving loan commitments and a $15.0 million term loan commitment, with
maturity dates of June 1, 2004 and January 28, 2007, respectively.
Borrowings under the revolving loan commitment bear interest rates, at the
option of the Company, and depending on the certain financial covenants,
equal to either (a) the greater of the prime rate, or the federal
funds rate plus 0.5%, plus a margin (which ranges from 0.25% to 2.0%) or
(b) the rate offered in the Eurodollar market for amounts and periods
comparable to the relevant loan, plus a margin (which ranges from 1.75%
to 3.5% and is determined by certain financial covenants).
Borrowings under the term loan commitment bear interest rates equal to the rate
offered in the Eurodollar market for 30 day borrowings, plus an applicable
margin (which ranges from 3.5% to 4.0% and is determined by certain
financial covenants).
The Credit Facility contains restrictive covenants including, but not
limited to (a) the Company's required maintenance of a minimum amount of
tangible net worth; (b) the Company's required maintenance of certain levels
of funded debt coverage; (c) limitations regarding additional indebtedness;
(d) the Company's required maintenance of a minimum amount of fixed charges
coverage; (e) limitations regarding consolidated capital expenditures and
(f) limitations regarding liens on assets. The Company was in compliance
with all such covenants during the nine months ended September 29, 2002.
Essentially all assets of the Company are pledged as collateral on the
Credit Facility. Additionally, the Credit Facility is guaranteed by Port
Royal through a secured pledge of all of the Company's common stock held by
Port Royal and the common stock of each existing and future subsidiary of the
Company.
Senior Notes--
In September 1997, the Company issued $100.0 million in unsecured 10.25% senior
notes ("the Notes") which mature on October 1, 2007. The Notes pay interest
semi-annually on April 1 and October 1 of each year. The Notes are redeemable
at the option of the Company at prices decreasing from 105 1/8% of the
principal amount on April 1, 2002 to 100% of the principal amount on
April 1, 2005. Additionally, upon a change of control of the Company, the
holders of the Notes will have the right to require the Company to purchase
all or a portion of the Notes at a price equal to 101% of the original
principal amount. The proceeds of the Notes were used to fund the acquisition
of the Company by Port Royal.
On December 31, 2001, May 30, 2002 and August 14, 2002, the Company purchased
$27.0 million, $20,000 and $4.0 million, respectively, aggregate principal
amount of its Notes. These Notes were retired resulting in an extraordinary
gain of $2.9 million. The extraordinary gain resulted from retirement
discounts of $5.7 million, offset by fees, taxes and other costs of
approximately $2.8 million.
5. SALE AND LEASEBACK TRANSACTION
On December 31, 2001, the Company entered into a real estate sale and
leaseback transaction in which it sold commercial real property and
improvements of 32 restaurant locations to an unaffiliated third party
and leased the properties back for a period of twenty years. Proceeds from
this transaction were approximately $23,317,000, net of expenses of $950,000.
The Company has the option to extend the leases past the original twenty years
for four additional periods of five years each. The leases are accounted for
as operating leases. The net proceeds of this transaction were used to
repurchase Notes with an aggregate principal of $27.0 million on
December 31, 2001.
The gain that the Company realized on the above real estate transactions was
approximately $4,101,000 and has been deferred and classified in the balance
sheets in Other Long-Term Liabilities, and will be amortized as a reduction
of rental expense over the life of the leases.
6. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal proceedings incidental to its
business. The ultimate disposition of these matters is not presently
determinable but will not, in the opinion of management and the Company's
legal counsel, have a material adverse effect on the Company's financial
condition or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the consolidated
financial statements of the Company (including the notes thereto)
contained elsewhere in this report.
Cash operating profit --
Cash operating profit (net income or loss before interest, taxes, depreciation,
amortization and other non-operating gains, losses or expenses) is one of the
key standards used by the Company to measure operating performance. Cash
operating profit is used to supplement operating income as an indicator of
operating performance and cash flows from operating activities as a measure of
liquidity, and not as an alternative to measures defined and required by
generally accepted accounting principles. Cash operating profit may not be
comparable to similarly titled measures reported by other companies.
Cash operating profit for the three months ended September 29, 2002 was $5.4
million compared to $4.7 million for the three months ended September 30, 2001,
an increase of 14.9%. This increase in cash operating profit was primarily
attributable to a decrease in cost of labor and food as a percent of
restaurant sales.
The following table reflects certain key operating statistics which impact the
Company's financial results:
KEY OPERATING STATISTICS
(Dollars in thousands, except average check)
For The Three For the Nine
Months Ended Months Ended
-------------------- ---------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
--------- -------- --------- --------
RESTAURANT SALES:
Company owned $ 61,555 $ 61,703 $185,492 $184,311
Franchise 36,784 32,473 107,283 91,902
-------- -------- -------- --------
SYSTEMWIDE RESTAURANT SALES $ 98,339 $ 94,176 $292,775 $276,213
Percent change 4.42% 3.99% 6.00% 3.78%
COMPANY RESTAURANT STATISTICS:
Number of restaurants 246 247 246 247
Restaurant Sales $ 61,555 $ 61,703 $185,492 $184,311
Percent change (0.24%) (3.29%) 0.64% (3.95%)
Percent change in same restaurant sales (0.04%) (0.28%) 1.38% (1.39%)
Selected components are --
Cost of restaurant sales $ 50,600 $ 52,085 $151,297 $156,322
As a percent of restaurant sales 82.21% 84.42% 81.56% 84.81%
Food and paper cost $ 18,631 $ 20,243 $ 56,379 $ 60,043
As a percent of restaurant sales 30.27% 32.81% 30.39% 32.58%
Direct labor $ 13,574 $ 13,938 $ 40,608 $ 42,301
As a percent of restaurant sales 22.05% 22.59% 21.89% 22.95%
Other labor costs $ 4,417 $ 4,677 $ 13,610 $ 14,673
As a percent of restaurant sales 7.18% 7.58% 7.34% 7.96%
Average check $ 4.77 $ 4.65 $ 4.74 $ 4.64
Percent change 2.58% 1.53% 2.16% 2.65%
FRANCHISE SYSTEM STATISTICS:
Number of restaurants 177 155 177 155
Restaurant Sales $ 36,784 $ 32,473 $107,283 $ 91,902
Percent change 13.28% 21.34% 16.74% 23.78%
Percent change in same restaurant sales (2.79%) (1.15%) (1.41%) (2.46%)
Average check $ 5.09 $ 4.99 $ 5.05 $ 4.94
Percent change 2.00% 4.61% 2.23% 6.01%
Comparison of the Three Months Ended September 29, 2002
-------------------------------------------------------
to the Three Months Ended September 30, 2001
--------------------------------------------
RESULTS OF OPERATIONS
---------------------
Total systemwide Krystal restaurant sales, which included restaurant sales of
$61.5 million for Company-owned units and $36.8 million for franchised units,
for the three months ended September 29, 2002 increased 4.4% to $98.3 million
compared to $94.2 million for the same period in 2001.
Total Company revenues increased $78,000 to $63.5 million in the three months
ended September 29, 2002 compared to the same period in 2001. The increase was
comprised of a $226,000 increase in royalty and franchise revenue, offset by a
$148,000 decrease in restaurant sales. The decrease in restaurant sales was
primarily due to one fewer Company owned restaurants in operation during the
period and a 0.04% decrease in same restaurant sales for the period. The
Company operated 246 restaurants at September 29, 2002 compared to 247
restaurants at September 30, 2001.
Company-owned same restaurant sales decreased 0.04%, compared to the same
period in 2001. The decrease was primarily attributable to a decrease in
restaurant volume, offset by an increase in average check amount for the three
months ended September 29, 2002 compared to the same period in 2001. The
average customer check for Company owned restaurants increased 2.58% to $4.77
for the three months ended September 29, 2002, compared to $4.65 for the same
period in 2001. This increase resulted primarily from price increases
implemented by the Company in the fourth quarter of 2001.
Franchise fee income was $257,000 in the three months ended September 29, 2002
compared to $173,000 in the same period in 2001. The increase in franchise
fees, which are collected upon the opening, transfer or renewal of new
franchise restaurants, related primarily to renewals and extensions of
franchise agreements. The Company's franchisees opened five franchised
restaurants in the three months ended September 29, 2002. During the three
months ended September 30, 2001, franchisees opened five new restaurants and
re-opened four additional restaurants that had been temporarily closed. There
were no franchise fees associated with the re-opened restaurants. Royalty
revenue increased 9.2% to $1.7 million in the three months ended
September 29, 2002 from $1.5 million in the same period in 2001. The increase
in royalty revenue, which is earned based on a percentage of sales by
franchise restaurants, was due to a 13.3% increase in franchise restaurant
sales resulting from an increase in the number of franchise restaurants in
operation. The franchise system operated 177 restaurants at
September 29, 2002 compared to 155 at September 29, 2001.
Cost of restaurant sales was $50.6 million for the three months ended
September 29, 2002 compared to $52.1 million for the same period in 2001.
Food and paper costs as a percent of restaurant sales decreased to 30.3% in
the three months ended September 29, 2002 from 32.8% in the same period in
2001. The decrease in food and paper costs as a percent of restaurant sales
resulted primarily from improved restaurant level controls over food and paper
usage, a shift in menu mix to higher margin offerings and the effect of the
Company's 1.4% price increase effected in the fourth quarter of 2001. Direct
labor as a percent of restaurant sales decreased to 22.0% for the three months
ended September 29, 2002 from 22.6% for the same period in 2001. Average
hourly wage increased 0.6% to $6.37 for the three months ended
September 29, 2002 from $6.33 for the same period in 2001. This increase
was more than offset by operating efficiencies from improvements in the
utilization of store level labor tracking systems.
Advertising expense was $2.6 million in the three months ended
September 29, 2002 and September 30, 2001. Advertising expense is accrued
based on 4.2% of restaurant sales and will vary with the volume of such sales.
Depreciation and amortization expenses decreased $795,000, or 22.4%, to $2.7
million in the three months ended September 29, 2002 compared to the same
period in 2001. The decrease resulted primarily from a reduction in
depreciation as a result of the sale and leaseback of 32 restaurants on
December 31, 2001 and the elimination of goodwill amortization expense
resulting from the adoption by the Company of SFAS 142 as of
December 31, 2001. Goodwill amortization expense for the three months
ended September 30, 2001 was approximately $491,900.
General and administrative expenses for the three months ended
September 29, 2002 was $4.5 million compared to $3.9 million for the same
period in fiscal 2001. The increase resulted primarily from an increase
of approximately $579,000 in accruals for the management incentive plan,
and an increase of approximately $106,000 in expense associated with the
Company's defined benefit plan. In the first nine months of 2001, the
Company's performance failed to meet the criteria for payment of management
incentive bonuses and, accordingly, no provision was made for such bonuses.
In the first nine months of 2002, the Company's year-to-date performance
warranted an accrual for the anticipated payment of such bonuses.
The increase in expense associated with the defined benefit plan resulted
from the actuarial impact of lower investment returns and lower interest
rates assumed in the actuarial valuation performed for fiscal 2002 compared
to the 2001 valuation. Because the Company's defined benefit plan is
currently over funded under the requirements of the Employee
Retirement Income Act of 1974, the increase in expense does not impact the
Company's funding policy for the defined benefit plan.
Other expenses, net, increased $176,000, or 88.0%, to $376,000 in the three
months ended September 29, 2002 compared to the same period in 2001. This
increase resulted primarily from a $496,200 charge for the impairment of
certain assets in the three months ended September 29, 2002 compared to a
$344,900 charge in the same period of 2001.
The Company recognized a $69,000 loss on sale of assets for the three months
ended September 29, 2002 compared to a loss of $48,000 for the same period in
2001. The loss in the third quarter of 2002 and 2001 resulted from the sale of
non-operating properties.
Interest expense, net of interest income, decreased $881,000 to $2.3 million in
the three months ended September 29, 2002 from $3.2 million in the same period
in 2001. This decrease resulted primarily from the Company's retirement of
$31.0 million of the Notes during fiscal 2002 and lower borrowings under its
Credit Facility during the quarter ended September 29, 2002.
The Company's income taxes benefit from continuing operations decreased for
the three months ended September 29, 2002 by $719,000, to a $63,000 expense
from a $656,000 benefit, in the same period in 2001.
In the quarter ended September 29, 2002, the Company recognized an
extraordinary gain of $174,000, net of income taxes of $106,000, resulting
from the repurchase and retirement $4.0 million aggregate principal amount
of the Company's Notes.
Comparison of the Nine Months Ended September 29, 2002
------------------------------------------------------
to the Nine Months Ended September 30, 2001
-------------------------------------------
RESULTS OF OPERATIONS
---------------------
Total systemwide Krystal restaurant sales, which included restaurant sales of
$185.5 million for Company-owned units and $107.3 million for franchised
units, for the nine months ended September 29, 2002 increased 6.0% to $292.8
million compared to $276.2 million for the same period in 2001.
Total Company revenues increased 1.1% to $191.4 million in the nine months
ended September 29, 2002 compared to $189.4 million in the same period in 2001.
The $2.0 million increase was comprised of a $1.2 million increase in
restaurant sales and a $824,000 increase in royalty and franchise revenue.
The increase in restaurant sales was primarily due to an increase in sales
volumes and check average, resulting in an increase in same restaurant sales.
The Company operated 246 restaurants at September 29, 2002 compared to 247
restaurants at September 29, 2001.
Company-owned same restaurant sales increased 1.4%, compared to the same period
in 2001. The increase was primarily attributable to an increase in average
check amount, offset by a decrease in sales volumes, for the nine months ended
September 29, 2002 compared to the same period in 2001. The average customer
check for Company owned restaurants increased 2.2% to $4.74 for the nine
months ended September 29, 2002, compared to $4.64 for the same period in 2001.
This increase resulted primarily from price increases of approximately 1.4%
implemented by the Company in the fourth quarter of 2001 and a shift in menu
mix to higher priced offerings.
Franchise fee income was $854,000 in the nine months ended September 29, 2002
compared to $676,000 in the same period in 2001. The increase
in franchise fees, which are collected upon the opening, transfer or renewal
of franchise restaurants, related primarily to the collection of franchise
renewals, transfer, and extension fees, offset by a reduction in the number
of franchise restaurants opened in the first nine months of 2002 compared to
2001. Franchise renewal, transfer and extension fees were approximately
$304,000 for the first nine months of 2002 compared to $26,000 in the same
period in 2001. The Company's franchisees opened 17 franchised restaurants
in the nine months ended September 29, 2002 compared to 24 in the same period
in 2001. Royalty revenue increased 14.8% to $5.0 million in the nine months
ended September 29, 2002 from $4.4 million in the same period in 2001. The
increase in royalty revenue, which is earned based on a percentage of sales
by franchise restaurants, was due to a 16.7% increase in franchise restaurant
sales resulting primarily from an increase in the number of franchise
restaurants in operation. The franchise system operated 177 restaurants at
September 29, 2002 compared to 155 at September 30, 2001.
Cost of restaurant sales was $151.3 million for the nine months ended
September 29, 2002 compared to $156.3 million for the same period in 2001.
Food and paper costs as a percent of restaurant sales decreased to 30.4% in the
nine months ended September 29, 2002 from 32.6% in the same period in 2001.
The decrease in food and paper costs as a percent of restaurant sales resulted
primarily from improved restaurant level controls over food and paper usage
and the effect of the Company's 1.4% price increase effected in the fourth
quarter of 2001. Direct labor as a percent of restaurant sales decreased
to 21.9% in the first nine months of 2002 from 23.0% in the same period in
2001. Average hourly wage increased 0.3% to $6.36 for the first nine months
of 2002 from $6.34 for the first nine months of 2001. This increase was more
than offset by operating efficiencies gained with increased sales volumes and
improvements in the utilization of store level labor tracking systems.
Advertising expense increased 0.7% to $7.8 million in the nine months ended
September 29, 2002 from $7.7 million in the same period in 2001. Advertising
expense is accrued based on 4.2% of restaurant sales and will vary with
the volume of such sales.
Depreciation and amortization expenses decreased $2.5 million, or 23.1%, to
$8.2 million in the nine months ended September 29, 2002 compared to the same
period in 2001. The decrease resulted primarily from a reduction in
depreciation as a result of the sale and leaseback of 32 restaurants on
December 31, 2001 and the elimination of goodwill amortization expense
resulting from the adoption by the Company of SFAS 142 as of December 31, 2001.
Goodwill amortization expense for the nine months ended September 29, 2001
was approximately $1.5 million.
General and administrative expenses for the nine months ended
September 29, 2002 were $13.4 million compared to $11.3 million for the same
period in fiscal 2001. The $2.1 million increase resulted primarily from an
increase of approximately $1.4 million in accruals for the management incentive
plan and an increase of approximately $734,000 in expense associated with the
Company's defined benefit plan. In the first nine months of 2001, the
Company's performance failed to meet the criteria for payment of management
incentive bonuses and, accordingly, no provision was made for such bonuses.
In the first nine months of 2002, the Company's year-to-date performance
warranted an accrual for the anticipated payment of such bonuses.
The increase in expense associated with the defined benefit plan resulted from
the actuarial impact of lower investment returns and lower interest rates
assumed in the actuarial valuation performed for fiscal 2002 compared to the
2001 valuation. Because the Company's defined benefit plan is currently over
funded under the requirements of the Employee Retirement Income Security
Act of 1974, the increase in expense does not impact the Company's funding
policy for the defined benefit plan.
Other expenses increased $187,000, or 222.4%, to $129,000 in the nine
months ended September 29, 2002 compared to the same period in 2001. This
increase resulted primarily from a $496,200 charge to the impairment of
certain assets in the nine months ended September 29, 2001 compared to
$344,900 for the same period in 2001.
The Company recognized an $69,000 loss on sale of assets for the nine months
ended September 29, 2002 compared to gains of $548,000 for the same period in
2001. The loss in the first nine months of 2002 resulted from the sale of
non-operating properties and the gains in same period of 2001 resulted from
the sale of a restaurant to a franchisee and the sale of other non-operating
properties.
Interest expense, net of interest income, decreased $2.5 million to $7.2
million in the nine months ended September 29, 2002 from $9.7 million in the
same period in 2001. This decrease resulted primarily from the Company's
retirement of $27.0 million of the Notes on December 31, 2001 and lower
borrowings under its Credit Facility during the nine months ended
September 29, 2002.
The Company's provision for income taxes from continuing operations for the
nine months ended September 29, 2002 increased $2.6 million, to a $0.8 million
tax expense from a $1.8 million tax benefit in the same period in 2001. The
effective rate was 31% in both periods. During the second quarter of 2002,
the Company revised its estimate of certain tax liability contingencies
resulting in a reduction of income tax expense of $200,000.
During the nine months ended September 29, 2002, the Company recorded an
extraordinary gain of $2.9 million, net of income taxes of $1.8 million,
resulting from the repurchase and retirement of approximately $31.0 million
aggregate principal value of the Company's Notes.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company does not maintain significant inventory or accounts receivables
since substantially all of its restaurants' sales are for cash. Royalties
from franchisees, which are payable weekly, and other receivables from
franchisees are closely monitored by the Company. The Company typically
receives several weeks of trade credit in purchasing food and supplies which is
standard in the restaurant business. The Company normally operates with
working capital deficits (current liabilities exceeding current assets) and had
a working capital deficit of $17.4 million at September 29, 2002, compared to a
working capital deficit of $11.2 million at December 30, 2001.
Capital expenditures totaled approximately $7.1 million in the nine months
ended September 29, 2002 as compared to $4.8 million in the same period in
2001. The Company opened no new restaurants during the nine months ended
September 29, 2002 or September 30, 2001. Approximately $2.7 million of the
Company's capital expenditures in the first nine months of 2002 resulted
from the purchase of leased assets previously recorded as capital
leases. Management estimates that capital expenditures will be approximately
$1.5 million during the remainder of 2002. Capital expenditures for the
remainder of the current year are expected to include the refurbishment and
remodeling of certain restaurants, ongoing capital improvements, and the
implementation of new restaurant cash register systems.
On December 31, 2001, May 28, 2002 and August 14, 2002, the Company purchased
$27.0 million, $20,000 and 4.0 million, respectively, aggregate principal
amount of its Notes. These Notes were retired resulting in an extraordinary
gain of $2.9 million. The extraordinary gain resulted from retirement
discounts of $5.6 million, offset by fees, taxes and other costs of
approximately $2.7 million.
During the second quarter of 2002, the Company exercised its option to purchase
certain leased assets that were previously classified as capital leases on the
balance sheet. The assets were purchased for $2.7 million.
0n January 28, 2002, the Company entered into a $25.0 million credit agreement
(the "Credit Facility"). The Credit Facility provides for $10.0 million in
revolving loan commitments and a $15.0 million term loan commitment, with
maturity dates of June 1, 2004 and January 28, 2007, respectively.
At September 29, 2002, the Company had available cash of approximately $8.6
million, receivables of $1.6 million, and $6.9 million available under the
Company's line of credit. In the opinion of management, these funds and funds
from operations will be sufficient to meet operating requirements, anticipated
capital expenditures and other obligations for the foreseeable future.
On October 17, 2002, the Company completed its sale of substantially all of the
assets of its fixed based hangar operations to Truman Arnold Companies for
$10.8 million. The Company expects that after taxes, fees and expenses the
estimated net proceeds from the sale will be approximately $7.0 million.
Approximately $2.4 million of the net proceeds was used to retire
outstanding senior debt, with the balance of the net proceeds being retained
by the Company for future capital expenditures or further reduction of
indebtedness.
The following table represents the Company's outstanding contractual
obligations of the types described below at September 29, 2002, excluding
letters of credit of approximately $3.5 million. The letters of credit are
maintained primarily to support the Company's insurance program and are
renewed on an annual basis.
Payments Due by Period
(Thousands of dollars)
- ---------------------------------------------------------------------------
Less
Contractual than 1 1-3 4-5 After 5
Obligations Total year years years years
- ---------------- -------- -------- -------- -------- --------
Senior Notes and
Other Borrowings $ 70,660 $ 2,565 $ 455 $ 67,155 $ 485
Lines of Credit 14,271 1,250 2,500 2,500 8,021
Capital Lease
Obligations 6,751 1,179 1,256 1,124 3,192
Operating Leases 85,404 8,033 13,485 11,036 52,850
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days
prior to the filing date of this quarterly report (the "Evaluation Date").
Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures are
effective in alerting them on a timely basis to material information relating
to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there
have not been any significant changes in the Company's internal controls or in
other factors that could significantly affect such controls.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various legal proceedings incidental to its
business. The ultimate disposition of these matters is not presently
determinable but will not, in the opinion of management, have a material
adverse effect on the Company's financial condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits-
No exhibit is filed with this 10-Q.
(b) Reports on Form 8-K-
Form 8-K dated as of September 4, 2002, was filed by the Company during
the third quarter of 2002 to report that the Company had entered into a
letter of intent to sell substantially all the assets of Krystal
Aviation Co.
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: 11/8/02 /s/Larry D. Bentley
- --------------- ------------------------
Larry D. Bentley
(Vice President, Chief Financial Officer
and Principal Accounting Officer)
CERTIFICATIONS
--------------
I, Philip H. Sanford, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Krystal
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
/s/Philip H. Sanford
---------------------------
Philip H. Sanford, Chairman
and Chief Executive Officer
I, Larry D. Bentley, Vice President and Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Krystal
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
/s/Larry D. Bentley
-----------------------
Larry D. Bentley, Vice
President and Chief Financial
Officer