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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 28, 2003
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 000-20040
---------------------------------
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
---- ----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of The Exchange Act).
YES NO X
---- ----
This report is filed by the Company pursuant to Section 15(d) of the Securities
Exchange Act of 1934. The Company has 100 shares of common stock outstanding
held of record by Port Royal Holdings, Inc. as of November 10, 2003.
THE KRYSTAL COMPANY
-------------------
September 28, 2003
------------------
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 accounting
principles generally accepted in the United States 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 28, 2003 and December 29, 2002,
and (2) the results of their operations for the three and nine months ended
September 28, 2003 and September 29, 2002 and (3) their cash flows for the
nine months ended September 28, 2003 and September 29, 2002 have been included.
The results of operations for the interim period ended September 28, 2003 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, including the following: any statements regarding
future sales or expenses, any statements regarding the continuation of
historical trends and any statements regarding the Company's future liquidity
and capital resources needs. Without limiting the foregoing, the words
"believe", "anticipates", "plans", "expects", and similar expressions are
intended to identify forward-looking statements. 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 rate of
growth of new franchise restaurant openings, 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 29, 2002.
PART I. FINANCIAL INFORMATION
-----------------------------
Item I. Financial Statements
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
September 28, December 29,
2003 2002
--------- ----------
ASSETS (Unaudited)
- ------
CURRENT ASSETS:
Cash and temporary investments $ 2,647 $ 10,690
Receivables, net 1,649 1,456
Inventories 2,299 1,783
Deferred income taxes 4,615 4,615
Prepayments and other 1,029 951
-------- --------
Total current assets 12,239 19,495
-------- --------
PROPERTY, BUILDINGS, AND EQUIPMENT, net 90,490 94,374
-------- --------
LEASED PROPERTIES, net 4,575 5,416
-------- --------
OTHER ASSETS:
Goodwill 36,186 36,186
Deferred financing costs, net 1,329 1,851
Other 891 986
-------- --------
Total other assets 38,406 39,023
-------- --------
TOTAL ASSETS $145,710 $158,308
======== ========
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
(In thousands)
September 28, December 29,
2003 2002
LIABILITIES AND SHAREHOLDER'S EQUITY ----------- ----------
- ------------------------------------ (Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 3,813 $ 5,505
Accrued liabilities 24,448 22,102
Current portion of long-term debt 1,193 1,250
Current portion of capital
lease obligations 690 1,042
-------- --------
Total current liabilities 30,144 29,899
-------- --------
LONG-TERM DEBT, excluding current portion 60,980 73,688
-------- --------
CAPITAL LEASE OBLIGATIONS, excluding
current portion 4,861 5,384
-------- --------
DEFERRED INCOME TAXES 7,700 9,392
-------- --------
OTHER LONG-TERM LIABILITIES 9,447 7,825
-------- --------
SHAREHOLDER'S EQUITY:
Common stock, without par value;
100 shares authorized, issued
and outstanding at September 28, 2003,
and at December 29, 2002 35,000 35,000
Accumulated other comprehensive loss ( 6,524) ( 6,524)
Retained earnings 4,102 3,644
-------- --------
Total shareholder's equity 32,578 32,120
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $145,710 $158,308
======== ========
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. 28, Sept. 29, Sept. 28, Sept. 29,
2003 2002 2003 2002
-------- -------- -------- --------
REVENUES:
Restaurant sales $ 60,900 $ 61,555 $177,440 $185,492
Franchise fees 290 257 768 854
Royalties 1,805 1,683 5,242 5,023
------- ------- ------- -------
62,995 63,495 183,450 191,369
------- ------- ------- -------
COST AND OTHER EXPENSES (INCOME):
Cost of restaurant sales 50,916 50,305 147,083 150,401
Advertising expense 2,557 2,586 7,452 7,791
Depreciation and amortization
expenses 2,792 2,747 8,427 8,192
General and administrative
expenses 4,630 4,843 14,026 14,344
Other expenses (income) ( 116) 376 ( 366) 129
------- ------- ------- -------
60,779 60,857 176,622 180,857
------- ------- ------- -------
OPERATING INCOME 2,216 2,638 6,828 10,512
GAIN (LOSS) ON SALE OF ASSETS 6 ( 69) 45 ( 69)
GAIN (LOSS) ON EXTINGUISHMENT OF DEBT ( 533) 280 ( 533) 4,655
INTEREST EXPENSE, net (2,013) (2,303) (5,978) (7,205)
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES ( 324) 546 362 7,893
BENEFIT FROM (PROVISION
FOR) INCOME TAXES 233 ( 169) 96 (2,623)
------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS ( 91) 377 458 5,270
INCOME FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES OF $138 FOR THE THREE
MONTHS AND $414 FOR THE NINE MONTHS IN 2002 -- 244 -- 716
------- ------- ------- -------
NET INCOME (LOSS) $ ( 91) $ 621 $ 458 $ 5,986
======= ======= ======= =======
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. 28, Sept. 29,
2003 2002
--------- ---------
OPERATING ACTIVITIES:
Net income $ 458 $ 5,986
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 8,427 8,332
Change in deferred taxes ( 1,692) ( 1,441)
Gain on extinguishment of debt 533 ( 4,655)
Gain on sale of assets ( 45) 58
Loss on impairment of asset -- 496
Changes in operating assets and liabilities:
Receivables, net ( 193) ( 172)
Inventories ( 70) 384
Prepayments and other ( 78) ( 180)
Accounts payable ( 1,692) ( 1,349)
Accrued liabilities 2,346 3,973
Other, net 2,069 1,410
-------- --------
Net cash provided by
operating activities 10,063 12,842
-------- --------
INVESTING ACTIVITIES:
Additions to property, buildings,
and equipment ( 6,225) ( 7,118)
Proceeds from sale of property,
buildings, and equipment 2,292 23,729
-------- -------
Net cash (used in) provided by
investing activities ( 3,933) 16,611
-------- -------
FINANCING ACTIVITIES:
Net payments under revolving
credit facility (13,298) ( 4,979)
Repayments of long-term debt -- (25,377)
Principal payments of
capital lease obligations ( 875) ( 3,573)
-------- -------
Net cash used in financing activities (14,173) (33,929)
-------- --------
NET DECREASE IN CASH AND
TEMPORARY INVESTMENTS ( 8,043) ( 4,476)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 10,690 13,042
--------- -------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 2,647 $ 8,566
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 4,156 $ 5,991
======= =======
Income taxes $ 1,543 $ 2,248
======= =======
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
A. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activities --
The Krystal Company ("Krystal") (a Tennessee corporation) is engaged primarily
in the development, operation and franchising of quick-service restaurants in
the Southeastern United States. The Company recognizes revenues from
restaurant sales upon delivery of the product to the customer.
The Company sold substantially all of the assets of the Company's fixed base
operation in Chattanooga, Tennessee ("Aviation") on October 17, 2002. The
sales price was $10.8 million and resulted in a gain on the sale of
$2.1 million, net of tax. The operating results of Aviation are classified
as discontinued operations, net of taxes.
Principles of Consolidation --
The accompanying consolidated financial statements include the accounts of
Krystal and its subsidiary (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.
Accounts Receivable and the Allowance for Doubtful Accounts --
Accounts receivable arise primarily from franchise fees, royalties owed by
franchisees and sales of products to franchisees. The Company evaluates the
collectibility of accounts receivable based on reviews of its customer's
ability to meet its financial obligations or as a result of changes in the
overall aging of accounts receivable. While the Company has a large customer
base that is geographically dispersed, a general economic downturn could
result in higher than expected defaults and, therefore, the need to revise
estimates for bad debts. The Company generally does not require collateral
for accounts receivable.
Franchise and License Agreements --
Franchise or license agreements are available for single Krystal restaurants
and multi-unit development agreements are available for the development of
several Krystal restaurants over a specified period of time. The multi-unit
development 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 28, 2003, there were 175 franchised or licensed
restaurants and at September 29, 2002, there were 177 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 4.5% to 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 when
the 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
sheet. At September 28, 2003 and September 29, 2002, total deferred franchise
and license fees were approximately $712,500 and $958,500, respectively.
Advertising --
The Company incurs expenditures for television, radio and print advertising to
support its products. This advertising maintains the important brand
franchise with the consuming public. The Company allocates a
percentage of the necessary supporting advertising expenses to each dollar of
sales by charging a percentage of sales on an interim basis based upon
anticipated annual sales and advertising expenditures (in accordance with
Accounting Principles Board Opinion No. 28) and adjusting that accrual to
the actual expenses incurred at the end of the year.
Fair Market Value of Financial Instruments --
The carrying amount reflected in the consolidated balance sheets for cash and
temporary investments, accounts receivable and accounts payable approximate
their respective fair values based on the short-term nature of these
instruments.
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. Those assumptions
include among others, the discount rate, expected return on plan assets and the
expected rates of increase in employee compensation and health care costs. In
accordance with accounting principles generally accepted in the United States,
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.
Subsequent to September 28, 2003, the Company amended its retirement
plan to eliminate future accrual of additional pension benefits for active
employees. The amendment, which was effective September 30, 2003, resulted
in a curtailment gain of $1.7 million and an increase in the additional
minimum pension liability of $3.1 million. Accumulated other comprehensive
income increased to $8.5 million, net of taxes. The curtailment gain and
adjustment to additional minimum pension liability will be recorded in the
Company's fiscal fourth quarter
ending December 28, 2003.
Effective with the change in the retirement plan, the Company established a
defined contribution employee benefit plan subject to IRS code 401(k). This
plan covers substantially all employees of the Company. Participants may
contribute a percentage of their compensation as allowed under applicable
laws. The plan provides for a matching contribution of up to 3.0% of the
employees' salary by the Company. Participants are 100% vested in participant
contributions and become vested in Company matching contributions over a
period of six years.
Accumulated Other Comprehensive Loss --
Accumulated other comprehensive loss is comprised of a minimum pension
liability of $6.5 million, net of taxes, at December 29, 2002 and
September 28, 2003. Effective September 30, 2003, the Company's fourth
fiscal quarter of 2003, accumulated other comprehensive loss will increase
to $8.5 million, net of taxes.
Stock Compensation --
On July 30, 1998, the Board of Directors of Port Royal Holdings, Inc.
authorized a nonqualified Incentive Stock Option Plan (the "Plan") for key
employees of the Company and its subsidiary. The Plan is administered by the
Compensation Committee (the "Committee") of the Board of Directors. Under the
Plan, the Committee may grant options of up to 1,000,000 shares of Port Royal
common stock. The Committee granted 700,000 options in 1998, of which 100,000
vest ratably over 5 years and the remaining 600,000 vest in 2007. These
700,000 options also contain a vesting acceleration provision if the Company
achieves certain cash flow targets. The acceleration provisions resulted in
75,000 options becoming vested in 1999 and 2000. No options became vested
under the acceleration provisions during the Company's first three fiscal
quarters of 2003 or during fiscal 2002. No options were granted or exercised
during the Company's first three fiscal quarters of 2003 or during fiscal 2002.
During the quarter ended September 28, 2003, 100,000 previously granted
options were forfeited and cancelled following the termination of employment
of a former option holder.
The fair value of each option grant has been estimated as of the date of the
grant using the minimum value option pricing model because there is no
established fair market value of Port Royal stock as it is not available
on the open market. The following weighted average assumptions were used for
fiscal year 1998 grants: expected dividend yield of 0%, a risk-free interest
rate of 5.49% and expected life of 10 years. Using these assumptions, the
fair value of the employee stock options granted in 1998 is $1,303,000, which
would be amortized as compensation expense over the vesting period of the
options, if the Company had elected to expense such options in accordance with
SFAS 123.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), requires use of option
valuation models that were not developed for use in valuing employee stock
options. Since the options to acquire Port Royal stock were granted at fair
value, no compensation expense has been recorded under APB 25.
The following table illustrates the effect on net income if the fair value
method had been applied to all outstanding and unvested options and
awards in each period.
The three months ended The nine months ended
---------------------- ---------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands)
Net Income (Loss):
As reported $ ( 91) $ 621 $ 458 $ 5,986
Stock compensation expense ( 16) ( 25) ( 51) ( 75)
------- ------- ------- -------
Pro forma $ ( 107) $ 596 $ 407 $ 5,911
======= ======= ======= =======
Use of Estimates --
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 and the differences could be material.
B. RECENT ACCOUNTING PRONOUNCEMENTS -
In April 2002, 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",("SFAS 145"). Among other things, SFAS 145
rescinds Statement of Financial Accounting Standards No. 4, "Reporting Gains
and Losses from Extinguishment of Debt" , 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
fiscal 2002, prior to the required adoption of SFAS 145, the Company reported
extraordinary gains aggregating $5.0 million 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 adopted SFAS 145 on
December 30, 2002. Accordingly, the extraordinary gains reported in 2002
have been reclassified.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148, which
was adopted by the Company on December 30, 2002, amends SFAS 123 and
Accounting Principles Board Opinion No. 28, "Interim Financial Reporting",
to require disclosure in the summary of significant accounting policies of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income in annual and interim financial statements.
The adoption of this pronouncement did not have an impact on our results of
operations, financial position or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires an entity to
disclose in its interim and annual financial statements information with
respect to its obligations under certain guarantees that it has issued. It
also requires an entity to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 are effective for interim
and annual periods ending after December 15, 2002. The Company is not party to
any guarantees as of December 29, 2002. The initial recognition and
measurement requirements of FIN 45 are effective prospectively for guarantees
issued or modified after December 31, 2002. Based on the Company's current
activities, management does not believe that the recognition requirements will
have a material impact on the Company's financial position, cash flows or
results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46").
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period ending after December 15, 2003. The adoption of this
pronouncement is not expected to have an impact on the Company's financial
statements.
In January 2003, the Emerging Issues Task Force of the FASB issued
EITF Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor" ("EITF 02-16"). EITF 02-16
addresses accounting and reporting issues related to how a reseller should
account for cash consideration received from vendors. Generally, cash
consideration received from vendors is presumed to be a reduction of the
prices of the vendor's products or services and should, therefore, be
characterized as a reduction of cost of sales when recognized in the
customer's income statement. However, under certain circumstances, this
presumption may be overcome and recognition as revenue or as a reduction of
other costs in the income statement may be appropriate. The Company adopted
the provisions of EITF 02-16 in fiscal 2002. The adoption of this
pronouncement did not have an impact on our results of operations, financial
position or cash flows.
C. SEGMENT REPORTING
The Company operates in two defined reportable segments: restaurants and
franchising. 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 agreements and collection of royalties from
franchisees of the Krystal brand. 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:
For the Nine Months Ended
- ------------------------------------------------------------------------------
September 28, September 29,
(in thousands) 2003 2002
- ------------------------------------------------------------------------------
Revenues:
Restaurants $177,440 $185,492
Franchising 6,010 5,877
- -----------------------------------------------------------------------------
Total segment revenues $183,450 $191,369
=============================================================================
Depreciation and Amortization:
Restaurants $ 8,361 $ 7,964
Franchising 2 3
- -----------------------------------------------------------------------------
Total segment depreciation and amortization $ 8,363 $ 7,967
=============================================================================
Interest expense:
Restaurant $ 6,054 $ 7,253
Franchising 0 0
- -----------------------------------------------------------------------------
Total segment interest expense $ 6,054 $ 7,253
=============================================================================
September 28, December 29,
2003 2002
- -----------------------------------------------------------------------------
Capital Expenditures:
Restaurants $ 6,225 $ 9,740
Franchising 0 0
- -----------------------------------------------------------------------------
Total segment capital expenditures $ 6,225 $ 9,740
=============================================================================
Total Assets:
Restaurants $141,997 $153,083
Franchising 2,160 2,043
- -----------------------------------------------------------------------------
Total segment assets $144,157 $155,126
=============================================================================
A reconciliation of segment depreciation and
amortization to consolidated depreciation and
amortization is as follows:
- -------------------------------------------------------------------------------
September 28, September 29,
2003 2002
- -------------------------------------------------------------------------------
Segment depreciation and amortization $ 8,363 $ 7,967
Unreported segments (1) 64 225
- -------------------------------------------------------------------------------
Total consolidated depreciation and amortization $ 8,427 $ 8,192
===============================================================================
A reconciliation of segment total assets to
consolidated total assets is as follows:
- -------------------------------------------------------------------------------
September 28, December 29,
2003 2002
- -------------------------------------------------------------------------------
Total segment assets $144,157 $155,126
Unreported segments (1) 1,553 3,182
- -------------------------------------------------------------------------------
Total consolidated assets $145,710 $158,308
===============================================================================
(1) Unreported segments do not meet the quantitative thresholds for segment
reporting.
D. INDEBTEDNESS
Senior Secured Credit Agreement--
0n June 30,2003, the Company amended its existing $25.0 million credit
agreement (the "Credit Facility"). The amended the Credit Facility,
which provides for borrowing up to $25.0 million, is made up of $19.85 million
in available credit and $5.15 million in outstanding letters of credit. The
amendment eliminated the term loan feature and modified certain other terms and
conditions. The existing term loan balance at September 28, 2003 was
repaid in full with an initial borrowing under the line of credit. The
prepayment of the $13.3 million term loan portion resulted in a prepayment
penalty of $533,000 and the retirement of $164,000 of deferred financing
costs, which were charged to expense in the quarter ended September 28, 2003.
The amended Credit Facility matures June 29, 2004.
Borrowings under the amended Credit Facility 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 0.00% to 1.0%) or
(b) the rate offered in the Eurodollar market for amounts and periods
comparable to the relevant loan, plus a margin (which ranges from 1.50%
to 2.75% and is determined by certain financial covenants.
The amended 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 covenants at September 28, 2003.
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.
During fiscal 2002, the Company purchased and retired $39.0 million aggregate
par value of its Notes. The retirement of the Notes resulted in a gain of
$3.0 million, net of taxes.
E. 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.
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. 28, Sept. 29, Sept. 28, Sept. 29,
2003 2002 2003 2002
--------- --------- ---------- ----------
RESTAURANT SALES:
Company owned $ 60,900 $ 61,555 $177,440 $185,492
Franchise 38,350 36,784 110,370 107,283
-------- -------- -------- --------
SYSTEMWIDE RESTAURANT SALES $ 99,250 $ 98,339 287,810 292,775
Percent change 0.93% 4.42% ( 1.70%) 6.00%
COMPANY RESTAURANT STATISTICS:
Number of restaurants 245 246 245 246
Restaurant Sales $ 60,900 $ 61,555 $177,440 $185,492
Percent change (1.06%) (0.24%) (4.34%) 0.64%
Percent change in same restaurant sales (0.84%) 0.04% (4.15%) 1.38%
Selected components are --
Cost of restaurant sales $ 50,916 $ 50,305 $147,083 $150,401
As a percent of restaurant sales 83.67% 81.72% 82.88% 81.08%
Food and paper cost $ 18,489 $ 18,336 $ 52,840 $ 55,483
As a percent of restaurant sales 30.36% 29.79% 29.78% 29.91%
Direct labor $ 13,181 $ 13,574 $ 38,735 $ 40,608
As a percent of restaurant sales 21.64% 22.05% 21.83% 21.89%
Other labor costs $ 4,579 $ 4,417 $ 13,503 $ 13,610
As a percent of restaurant sales 7.52% 7.18% 7.61% 7.34%
Average check $ 4.76 $ 4.77 $ 4.73 $ 4.74
Percent change (0.21%) 2.58% (0.21%) 2.16%
FRANCHISE SYSTEM STATISTICS:
Number of restaurants 175 177 175 177
Restaurant Sales $ 38,350 $ 36,784 $110,370 $107,283
Percent change 4.25% 13.28% 2.88% 16.74%
Percent change in same restaurant sales (2.04%) (2.79%) (4.32%) (1.41%)
Average check $ 5.15 $ 5.09 $ 5.07 $ 5.05
Percent change 1.18% 2.00% 0.40% 2.23%
Comparison of the Three Months Ended September 28, 2003
-------------------------------------------------------
to the Three Months Ended September 29, 2002
--------------------------------------------
RESULTS OF OPERATIONS
---------------------
Total system wide Krystal restaurant sales, which included restaurant sales of
$60.9 million for Company-owned units and $38.4 million for franchised units,
for the three months ended September 28, 2003 increased 0.9% to $99.3 million
compared to $98.3 million for the same period in 2002.
Total Company revenues decreased $0.5 million to $63.0 million in the three
months ended September 28, 2003 compared to the same period in 2002. The
decrease was primarily due to a $0.7 million decrease in restaurant sales. The
decrease in restaurant sales was primarily due to operating one fewer
restaurant and a 0.84% decrease in same restaurant sales for the period.
The Company operated 245 restaurants at September 28, 2003 compared to 246
restaurants at September 29, 2002.
Company-owned same restaurant sales decreased 0.84%, compared to the same
period in 2002. The decrease was primarily attributable to a decrease in
restaurant volume for the three months ended September 28, 2003 compared to
the same period in 2002. The average customer check for Company owned
restaurants was $4.76 for the three months ended September 28, 2003 compared
to $4.77 for the same period in 2002.
Franchise fee income was $290,000 in the three months ended September 28, 2003
compared to $257,000 for the same period in 2002. Franchise fees are
recorded upon the opening of franchise restaurants. Franchise fees are
also recorded upon the transfer, extension, renewal or default of franchise
agreements. The Company's franchisees opened two and five franchised
restaurants in the three months ended September 28, 2003 and
September 29, 2002, respectively. The Company recognized $225,000 in
franchise fees upon termination of a multi-unit development agreement.
Royalty revenue increased 7.3% to $1.8 million in the three months ended
September 28, 2003 from $1.7 million in the same period in 2002. The increase
in royalty revenue, which is earned based on a percentage of sales by
franchise restaurants, was due to a 4.3% increase in franchise restaurant
sales resulting from an increase in the number of franchise restaurants days
in operation. The franchise system had 16,822 restaurant days for the three
months ended September 28, 2003 compared to 15,936 restaurant days for the
same period in 2002. Restaurant days are calculated by taking the total
number of franchise restaurants open during the period times the number of
days each one was open during the period.
Cost of restaurant sales was $50.9 million for the three months ended
September 28, 2003 compared to $50.3 million for the same period in 2002.
Food and paper costs as a percent of restaurant sales increased to 30.4% in
the three months ended September 28, 2003 from 29.8% in the same period in
2002. The increase in food and paper costs as a percent of restaurant sales
resulted primarily from increases in beef prices offset somewhat by 0.43% menu
price increases. Direct labor as a percent of restaurant sales decreased to
21.64% for the three months ended September 28, 2003 from 22.05% for the same
period in 2002. Average hourly wage was $6.25 for the three months ended
September 28, 2003 and $6.29 for the same period in 2002.
Advertising expense decreased 1.1% to $2.56 million in the three months ended
September 28, 2003 from $2.59 million in the same period in fiscal 2002.
Advertising expense was accrued based on 4.2% of restaurant sales and will
vary with the volume of such sales.
Depreciation and amortization expenses increased $45,000, or 1.6%, to $2.8
million in the three months ended September 28, 2003 compared to the same
period in 2002.
General and administrative expenses for the three months ended
September 28, 2003 were $4.6 million compared to $4.8 million for the same
period in fiscal 2002. The decrease resulted primarily from the elimination
of accruals for the Company's management incentive plan, offset by an
increase in expense associated with the Company's defined and postretirement
benefit plans and employee severance expenses. The increase in expense
associated with the defined benefit plan resulted from the impact of lower
investment returns and lower interest rates assumed in the actuarial valuation
performed in fiscal 2002. In the three months ended September 28, 2003, the
Company's performance failed to meet the criteria for payment of management
incentive bonuses and, accordingly, no provision was made for such bonuses.
Other income (expense) increased $492,000 or 130.8%, to income of $116,000 in
the three months ended September 28, 2003 compared to an expense of $376,000
in the same period in 2002. This change resulted from impairment expenses of
$496,000 recorded in the three months ended September 29, 2002. No impairment
expense was recorded in the third quarter of 2003.
The Company recognized a $533,000 loss on extinguishment of debt in the three
months ended September 28, 2003 that resulted from the amendment and
restatement of the credit agreement dated June 30, 2003. The Company recorded
a gain of $280,000 in the three months ended September 29, 2002 that resulted
from the retirement of a portion of the Company's 10.25% Senior Notes.
Interest expense, net of interest income, decreased $290,000 to $2.0 million in
the three months ended September 28, 2003 from $2.3 million in the same period
in 2002. This decrease resulted primarily from the Company's retirement of
$12.0 million of the Notes during the last three quarters of 2002, a $4.2
million reduction in its capital lease obligations in the last three quarters
of 2002 and the first three quarters of 2003 and lower borrowings under its
Credit Facility during the quarter ended September 28, 2003.
The Company's income tax expense from continuing operations decreased for
the three months ended September 28, 2003 by $402,000, to a benefit of
$233,000 from an expense of $169,000 in the same period in 2002. The
effective income tax rate increased to 71.9% in the three months ended
September 28, 2003 from 31.0% in the same period in 2002 reflecting
the effect of permanent differences and tax credits.
Comparison of the Nine Months Ended September 28, 2003
------------------------------------------------------
to the Nine Months Ended September 29, 2002
-------------------------------------------
RESULTS OF OPERATIONS
---------------------
Total system wide Krystal restaurant sales, which included restaurant sales of
$177.4 million for Company-owned units and $110.4 million for franchised units,
for the nine months ended September 28, 2003 decreased 1.7% to $287.8 million
compared to $292.8 million for the same period in 2002.
Total Company revenues decreased $7.9 million to $183.5 million in the nine
months ended September 28, 2003 compared to the same period in 2002. The
decrease resulted from a $8.1 million decrease in restaurant sales. The
decrease in restaurant sales was primarily due to operating one less
restaurant and a 4.1% decrease in same restaurant sales for the period.
The Company operated 245 restaurants at September 28, 2003 compared to
246 restaurants at September 28, 2002.
Company-owned same restaurant sales decreased 4.1%, compared to the same
period in 2002. The decrease was primarily attributable to a decrease in
restaurant volume for the nine months ended September 28, 2003 compared to the
same period in 2002. The average customer check for Company owned restaurants
was $4.73 for the nine months ended September 28, 2003 compared to $4.74 for
the same period in 2002.
Franchise fee income was $768,000 in the nine months ended September 28, 2003
compared to $854,000 in the same period in 2002. Franchise fees are recorded
upon opening of franchise restaurants. Franchise fees are also recorded
upon the transfer, extension, renewal or default of franchise agreements.
The Company's franchisees opened 14 franchised restaurants in the nine months
ended September 28, 2003 and they opened 17 during the same period in 2002.
The decrease in franchise fees in the nine months ended September 28, 2003
related primarily to fewer openings and transfers and extensions of
franchise agreements than in same period of 2002. Royalty revenue increased
4.4% to $5.2 million in the nine months ended September 28, 2003 from $5.0
million in the same period in 2002. The increase in royalty revenue, which
is earned based on a percentage of sales by franchise restaurants, was
due primarily to a 2.9% increase in franchise restaurant sales resulting from
an increase in the number of franchise restaurants days in operation. The
franchise system had 49,823 restaurants days for the nine months ended
September 28, 2003 compared to 46,703 restaurant days for the same period
in 2002. Restaurant days are calculated by taking the total number of
franchise restaurants open during the period times the number of days each
one was open during the period.
Cost of restaurant sales was $147.1 million for the nine months ended
September 28, 2003 compared to $150.4 million for the same period in 2002.
Food and paper costs as a percent of restaurant sales decreased to 29.8% in
the nine months ended September 28, 2003 from 29.9% in the same period in 2002.
The decrease in food and paper costs as a percent of restaurant sales resulted
primarily from menu price increases amounting to 0.43%. Direct labor as a
percent of restaurant sales decreased to 21.8% for the nine months ended
September 28, 2003 from 21.9% for the same period in 2002, due in part
to a decrease in the average hourly wage rate. Average hourly wage decreased
0.2% to $6.28 for the nine months ended September 28, 2003 from $6.29 for the
same period in 2002.
Advertising expense decreased 4.3% to $7.5 million in the nine months ended
September 28, 2003 from $7.8 million in the same period in fiscal 2002.
Advertising expense was accrued based on 4.2% of restaurant sales and will
vary with the volume of such sales.
Depreciation and amortization expenses increased $235,000, or 2.9%, to $8.4
million in the nine months ended September 28, 2003 compared to the same
period in 2002.
General and administrative expenses for the nine months ended
September 28, 2003 were $14.0 million compared to $14.3 million for the same
period in fiscal 2002. The decrease resulted primarily from an increase of
approximately $1.2 million in expense associated with the Company's defined
and postretirement benefit plans offset by the elimination of approximately
$1.2 million in accruals for the Company's management incentive plan.
The increase in expense associated with the defined benefit plan resulted
from the impact of lower investment returns and lower interest rates assumed
in the actuarial valuation performed in fiscal 2002. In the first nine
months of 2003, 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 the accrual of such bonuses.
Other income (expense) increased $495,000 or 383.7%, to income of $366,000
in the nine months ended September 28, 2003 compared to expense of $129,000
in the same period in 2002. This change resulted from an asset impairment
charge of $496,000 recorded in the third quarter of 2002.
The Company recognized a $45,000 gain on sale of assets for the nine months
ended September 28, 2003 as a result of sales of non-operating properties.
The Company recognized a $533,000 loss on extinguishment of debt in the nine
months ended September 28, 2003 that resulted from the amendment of the
Company's restated Credit Facility compared to a $4.7 million gain in the
same period in 2002 that resulted from the retirement of a portion of
the Company's 10.25% Senior Notes.
Interest expense, net of interest income, decreased $1.2 million to $6.0
million in the nine months ended September 28, 2003 from $7.2 million in
the same period in 2002. This decrease resulted primarily from the Company's
retirement of $12.0 million of the Notes during the last three quarters of
2002, a $4.0 million reduction in its capital lease obligations in the last
three quarters of 2002 and first three quarters of 2003 and lower borrowings
under its Credit Facility during the first nine months of 2003.
The Company's income tax expense from continuing operations decreased for
the nine months ended September 28, 2003 by $2.7 million, to a $96,000
benefit from expense of $2.6 million in the same period in 2002. The
effective income tax rate decreased to 26.5% in the nine months ended
September 28, 2003 from 33.2% in the same period in 2002 reflecting the
effects of permanent differences and tax credits.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company does not maintain significant inventories 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 $17.9 million at September 28, 2003, compared to a
working capital deficit of $10.4 million at December 29, 2002. The increase
in the deficit relates primarily to the use of cash to repay debt.
Capital expenditures totaled approximately $6.2 million in the nine months
ended September 28, 2003, as compared to $7.1 million in the same period in
2002. The Company opened no new restaurants during the three months ended
September 28, 2003 or September 29, 2002. Management estimates that capital
expenditures will be approximately $3.1 million during the remainder of 2003.
Capital expenditures for the remainder of the current year are expected to
include the refurbishment and remodeling of certain restaurants and ongoing
capital improvements.
0n June 30,2003, the Company amended its existing $25.0 million credit
agreement (the "Credit Facility"). The amended the Credit Facility,
which provides for borrowing up to $25.0 million, is made up of $19.85 million
in available credit and $5.15 million in outstanding letters of credit. The
amendment eliminated the term loan feature and modified certain other terms and
conditions. The existing term loan balance at September 28, 2003 was
repaid in full with an initial borrowing under the line of credit. The
prepayment of the $13.3 million term loan portion resulted in a prepayment
penalty of $533,000 and the retirement of $164,000 of deferred financing
costs, which were charged to expense in the quarter ended September 28, 2003.
The amended Credit Facility matures June 29, 2004.
During the quarter ended March 31, 2002, the Company entered into a real
estate sale and leaseback transaction in which it sold the commercial real
estate and improvements of 32 company operated restaurant locations to an
unaffiliated third party and leased the properties back for a period of 20
years. Proceeds from this transaction of approximately $23.3 million, net of
expenses of approximately $1.0 million, were primarily used to purchase a
portion of the Company's 10.25% Senior Notes during fiscal 2002.
At September 28, 2003, the Company had available cash of approximately $2.6
million, receivables of $1.6 million, and $19.7 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.
Critical Accounting Policies --
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States,
which require management to make estimates that affect the amounts of
revenues, expenses, assets and liabilities reported. The following are
critical accounting matters which are both very important to the portrayal
of the Company's financial condition and results and which require some of
management's most subjective and complex judgments. The accounting for
these matters involves the making of estimates based on current facts,
circumstances and assumptions which, in management's judgment, could change
in a manner that would materially affect management's future estimates with
respect to such matters and, accordingly, could cause future reported
financial condition and results to differ materially from financial results
reported based on management's current estimates.
Accounts Receivable. The Company performs ongoing credit evaluations of
its franchisees based upon payment history and the franchisees current credit
worthiness. The Company continuously monitors collections from franchisees
and maintains a provision for estimated credit losses based upon its review of
franchisee financial condition and other relevant franchisee specific
credit information. While such credit losses have historically been within the
Company's expectations and the provisions established, it is possible that its
credit loss rates could be higher or lower in the future.
Impairment of Long-Lived Assets and Goodwill. The Company periodically
evaluates fixed assets and goodwill for indicators of potential impairment.
The Company's judgments regarding potential impairment are based on legal
factors, market conditions and operational performance. Future events could
cause the Company to conclude that assets associated with a particular
operation are impaired. Evaluating the extent of an impairment also requires
the Company to estimate future operating results and cash flows which also
require judgment by management. Any resulting impairment loss could have a
material adverse impact on the Company's financial condition and results of
operations.
Self-Insurance. The Company is self-insured for the majority of its
group health insurance costs, workers' compensation insurance costs, and
general liabilities subject to specific retention levels. Benefits
administrators assist the Company in evaluating claims data to determine the
liability for self-insured claims. While the Company's management believes
that its assumptions are appropriate, significant differences in actual
experience or significant changes in the Company's assumptions may materially
affect these self insured costs.
Accounting for Income Taxes. As part of the process of preparing the
Company's consolidated financial statements, the Company is required to
estimate its income taxes in each of the jurisdictions in which it operates.
This process involves the Company estimating its actual current tax expense
together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included within the
Company's consolidated balance sheet. While the Company's management believes
that its assumptions are appropriate, significant differences in its actual
experience or significant changes in its assumptions may materially affect
the Company's income tax expense.
Pension and Other Post-retirement Benefits. The determination of the
Company's obligation and expense for pension and other post-retirement
benefits is dependent on its selection of certain assumptions used by
actuaries in calculating such amounts. Those assumptions are disclosed in
Note 6 to the 2002 consolidated financial statements and include, among others,
the discount rate, expected long-term rate of return on plan assets and rates
of increase in compensation levels and health care costs. These assumptions
are periodically adjusted based on management's judgement and consultations
with actuaries and others. In accordance with accounting principles
generally accepted in the United States, actual results that differ from the
Company's assumptions are accumulated and amortized over future periods and,
therefore, generally affect its recognized expense, recorded obligation and
funding requirements in future periods. While the Company's management
believes that its assumptions are appropriate, significant differences in
its actual experience or significant changes in its assumptions may
materially affect its pension and other post-retirement benefit obligations
and its future expense.
Franchise Revenue Recognition. The Company recognizes revenues related
to Franchise fees when the related stores are opened. Changes in the timing of
planned store openings and defaults on agreements can have a material impact
on the timing of the recognition of such revenues.
Item 3. Quantitative and qualitative disclosures about market risks
Our market risk is limited to fluctuations in interest rates as it pertains to
our borrowings under our Credit Facility. Borrowings under the amended Credit
Facility bear interest rates, at the option of the Company, and depending on
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).
If the interest rates on our borrowings average 100 basis points (1.0%) more
in fiscal 2003 than they did in fiscal 2002, our interest expense would
increase and income before income taxes would decrease by approximately
$100,000. This amount is determined solely by considering the impact of the
hypothetical change in the interest rate on our borrowing cost without
consideration for other factors such as actions management might take to
mitigate its exposure to interest rate changes.
The Company is also exposed to the impact of commodity price fluctuations
related to unpredictable factors such as weather and various other market
conditions outside its control. From time to time, the Company enters into
commodity futures and option contracts to manage these fluctuations. The
Company had no futures and options contracts as of September 28, 2003.
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 the end of the period
covered by this report. 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, except that the
Company has implemented an additional required approval of the Chief Executive
Officer's expenses.
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-
Rule 13a-14(a) certifications of Chief Executive Officer and Chief
Financial Officer. (Exhibits 31.1 and 31.2)
Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Exhibit 32)
(b) Reports on Form 8-K-
On July 28, 2003, Form 8-K was filed announcing the resignation of the
Company's Chairman of the Board and Chief Executive Officer.
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: November 6, 2003 /s/Larry D. Bentley
- ----------------------- ------------------------
Larry D. Bentley
(Senior Vice President, Chief Financial
Officer and Principal Accounting Officer)
EXHIBIT INDEX
- -------------------------------------------------------------------------------
Exhibit No. Description of Exhibit
----------- ----------------------
31.1 Rule 13a-14(a) certification of Chief Executive
Officer
31.2 Rule 13a-14(a) certification of Chief Financial
Officer
32 Certification pursuant to 18 U.S.C. Section 1350, as
as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
EXHIBIT 31.1
------------
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
----------------------------------------
I, James F. Exum, Jr. 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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
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 report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 10, 2003
/s/James F. Exum, Jr.
---------------------------
James F. Exum, Jr., Chief
Executive Officer
EXHIBIT 31.2
------------
CERTIFICATION OF CHIEF FINANCIAL 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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
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 report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 10, 2003
/s/Larry D. Bentley
-----------------------
Larry D. Bentley, Senior Vice
President and Chief Financial Officer
Exhibit No. 32
--------------
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED
STATES CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections
(a) and (b) of section 1350, chapter 63 of title 18, United States Code),
each of the undersigned officers of The Krystal Company, a Tennessee
corporation (the "Company"), does hereby certify, to such officer's
knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended September 28, 2003
(the "Form 10-Q") of the Company fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information
contained in the Form 10-Q fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Dated: November 10, 2003 /s/James F. Exum, Jr.
-------------------------------------
James F. Exum, Jr.
Chief Executive Officer
Dated: November 10, 2003 /s/Larry D. Bentley
-------------------------------------
Larry D. Bentley
Senior Vice President and
Chief Financial Officer
The foregoing certification is being furnished solely pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of
Section 1350, chapter 63 of title 18, United States Code) and is not being
filed as part of the Form 10-Q or as a separate disclosure document.
A signed original of this written statement required by Section 906 has been
provided to The Krystal Company and will be retained by The Krystal Company
and furnished to the Securities and Exchange Commission or its staff upon
request.