FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----- -----
Commission file number 0-20040
-------------------------------
THE KRYSTAL COMPANY
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TENNESSEE 62-0264140
--------- ----------
(State or other jurisdiction of (IRS Employer identification
incorporation or organization) Number)
One Union Square, Chattanooga, TN 37402
- -----------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(423) 757-1550
- -----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
---- ----
This report is filed by the Company pursuant to Section 15(d) of the
Securities Exchange Act of 1934. The Company has 100 shares of common
stock outstanding held of record by Port Royal Holdings, Inc. as of
August 7, 1998.
THE KRYSTAL COMPANY
-------------------
JUNE 28, 1998
-------------
PART I. FINANCIAL INFORMATION
------------------------------
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading. These condensed financial
statements should be read in conjunction with the Company's latest
annual report on Form 10-K.
In the opinion of management of the Company, all adjustments necessary to
present fairly (1) the financial position of The Krystal Company and
Subsidiary as of June 28, 1998 and December 28, 1997, and (2) their change
in shareholders' equity for the six months ending June 28, 1998 and (3) the
results of their operations, and their cash flows for the six months ended
June 28, 1998 and June 29, 1997 and (4) the results of their operations for
the three months ended June 28, 1998 and June 29, 1997 have been included.
The results of operations for the interim period ended June 28, 1998 are not
necessarily indicative of the results for the full year.
This Form 10-Q contains certain forward-looking information that reflects
management's current outlook for 1998. These expectations are based
on currently available competitive, financial and economic data
along with the Company's operating plans, and are subject to future events
and uncertainties. Among the Company's events and uncertainties which could
adversely affect 1998 results are lower than expected customer visits and/or
average expenditures resulting from marketplace competition, material changes
from expectations in the cost of materials or ingredients, an inability to
attract and retain a sufficient number of employees at expected wage rates,
material fluctuations in interest rates and economic downturns. The
information provided herein should be read in conjunction with information
provided in the Company's Form 10-K for the fiscal year ended
December 28, 1997.
<TABLE>
PART I. FINANCIAL INFORMATION
-----------------------------
Item I. Financial Statements
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
<CAPTION>
June 28, December 28,
1998 1997
-------- ---------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
- -----------------
CURRENT ASSETS:
Cash and temporary investments $ 560 $ 5,507
Receivables, net 1,434 1,477
Income tax receivable 4,812 4,582
Inventories 1,957 2,241
Deferred income taxes 2,738 2,736
Prepayments and other 1,432 1,135
------- -------
Total current assets 12,933 17,678
------- -------
PROPERTY, BUILDINGS, AND EQUIPMENT, net 99,795 101,200
------- -------
LEASED PROPERTIES, net 1,677 1,660
------- -------
OTHER ASSETS:
Cash surrender value of life insurance - 6,266
Prepaid pension asset 8,592 8,955
Deferred financing cost, net 4,988 5,359
Goodwill, net 47,692 48,674
Other 298 329
------- -------
Total other assets 61,570 69,583
------- -------
TOTAL ASSETS $175,975 $190,121
======= =======
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
(In thousands)
<CAPTION>
June 28, December 28,
1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY ------- ---------
- ------------------------------------ (Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 7,128 $ 6,819
Accrued liabilities 20,015 19,399
Current portion of long-term debt 53 53
Current portion of capital
lease obligations 192 235
------- -------
Total current liabilities 27,388 26,506
------- -------
LONG-TERM DEBT, excluding current portion 100,160 112,174
------- -------
CAPITAL LEASE OBLIGATIONS, excluding
current portion 2,050 2,029
------- -------
DEFERRED INCOME TAXES 10,256 10,256
------- -------
OTHER LONG-TERM LIABILITIES 1,515 4,695
------- -------
SHAREHOLDERS' EQUITY:
Common stock, without par value;
100 shares authorized; issued
and outstanding, at June 28, 1998,
and at December 28, 1997 35,000 35,000
Retained earnings (deficit) ( 394) ( 539)
------- -------
Total shareholders' equity 34,606 34,461
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $175,975 $190,121
======= =======
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands)(Unaudited)
<CAPTION>
Post-Merger | Pre-Merger Post-Merger | Pre-Merger
Company | Company Company | Company
---------- | --------- ---------- | ----------
For the Three Months Ended, For the Six Months Ended,
-----------|------- ----------|---------
June 28, | June 29, June 28, | June 29,
1998 | 1997 1998 | 1997
-------- | -------- -------- | --------
<S> <C> | <C> <C> | <C>
REVENUES: | |
Restaurant sales $ 59,186 | $ 61,220 $116,664 | $118,484
Franchise fees 110 | 138 237 | 179
Royalties 913 | 767 1,744 | 1,474
Other revenues 1,337 | 1,200 2,526 | 2,351
------- | ------- ------- | -------
61,546 | 63,325 121,171 | 122,488
-------- | ------- ------- | -------
COST AND OTHER EXPENSES: | |
Cost of restaurant sales 48,905 | 50,032 96,617 | 97,515
Depreciation and amortization | |
expenses 3,213 | 2,673 6,445 | 5,295
General and administrative | |
expenses 5,999 | 7,114 11,877 | 13,831
Other expenses, net 836 | 837 1,623 | 1,668
------- | ------- ------- | -------
58,953 | 60,656 116,562 | 118,309
------- | ------- ------- | -------
OPERATING INCOME 2,593 | 2,669 4,609 | 4,179
REORGANIZATION ITEM: | |
Professional fees and | |
other expenses - | ( 343) - | ( 1,062)
| |
GAIN ON SETTLEMENT OF DEFERRED | |
COMPENSATION OBLIGATIONS 350 | - 1,805 |
| |
INTEREST EXPENSE: | |
Contractual rate interest, net ( 2,786) | ( 821) ( 5,607)| ( 1,500)
Interest related to certain | |
pre-petition liabilities, net - | 278 - | 96
------- | ------- ------- | -------
INCOME BEFORE PROVISION FOR INCOME | |
TAXES AND EXTRAORDINARY ITEM 157 | 1,783 807 | 1,713
| |
PROVISION FOR INCOME TAXES 240 | 676 662 | 649
------- | ------- ------- | -------
INCOME (LOSS) BEFORE EXTRAORDINARY | |
ITEM ( 83) | 1,107 145 | 1,064
EXTRAORDINARY ITEM: | |
Loss on early extinguishment of | |
debt, net of applicable income | |
tax benefit of $134,000 in 1997 - | - - | ( 220)
------- | ------- ------- | -------
NET INCOME (LOSS) $( 83) |$ 1,107 $ 145 | $ 844
======= | ======= ======= | =======
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE SIX MONTHS ENDED
------------------------
JUNE 28, 1998
-------------
(In thousands)
(Unaudited)
<CAPTION> Retained
Common Earnings
Stock (Deficit)
------ --------
<S> <C> <C>
BALANCE, December 28, 1997 $35,000 $( 539)
Net income - 145
------ ------
BALANCE, June 28, 1998 $35,000 $( 394)
====== ======
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(Unaudited)
<CAPTION>
Post-Merger | Pre-Merger
Company | Company
------------ | ------------
For The Six Months Ended,
--------------|-------------
June 28, | June 29,
1998 | 1997
----------- | ------------
<S> <C> | <C>
OPERATING ACTIVITIES: |
Net income $ 145 | $ 844
Adjustments to reconcile net income |
to net cash provided by operating |
activities- |
Depreciation and amortization 6,445 | 5,295
Change in deferred taxes ( 2) | 1
Loss on early extinguishment of debt - | 354
Decrease in receivables 43 | 835
(Increase) in income tax receivable ( 230) | -
Decrease in inventories 284 | 186
(Increase)decrease in prepayments and other ( 442) | 669
Increase in accounts payable 309 | 863
(Decrease) in income taxes payable - | ( 461)
Increase(decrease) in accrued liabilities 616 | ( 2,777)
Other 2,597 | ( 1,387)
Decrease in liabilities from reorganization |
activities - | (22,317)
-------- | --------
Net cash provided by (used in) |
operating activities 9,765 | (17,895)
-------- | --------
INVESTING ACTIVITIES: |
Additions to property, buildings, |
and equipment ( 3,818) | ( 3,902)
Proceeds from sale of property, |
buildings, and equipment 125 | 393
Payments received on net investment in |
direct financing leases 145 | 336
-------- | --------
Net cash used in investing activities ( 3,548) | ( 3,173)
-------- | --------
FINANCING ACTIVITIES: |
Decrease in debt from reorganization |
activities - | (36,000)
Proceeds from borrowing - | 36,320
Repayments of long-term debt (11,142) | ( 2,917)
Principal payments of capital |
lease obligations ( 22) | ( 271)
-------- | --------
Net cash used in financing activities (11,164) | ( 2,868)
-------- | --------
NET DECREASE IN CASH AND |
TEMPORARY INVESTMENTS ( 4,947) | (23,936)
|
CASH AND TEMPORARY INVESTMENTS, |
beginning of period 5,507 | 28,765
-------- | --------
CASH AND TEMPORARY INVESTMENTS, |
end of period $ 560 | $ 4,829
======== | ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW |
INFORMATION: |
Cash paid during the period for: |
Interest $ 5,884 | $ 6,012
Income taxes 900 | 1,159
Reorganization item: professional fees |
and other expenses - | 870
======== | =======
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
1. MERGER WITH PORT ROYAL HOLDINGS INC.
On September 26, 1997(effective September 29, 1997 for accounting purposes),
pursuant to an Agreement and Plan of Merger by and among the Company,
Port Royal Holdings, Inc. ("Port Royal") and TKC Acquisition Corp. dated
July 3, 1997, Port Royal acquired the Company for an aggregate purchase
price equal to $108,403,276 (the "Acquisition"). As a result of the merger,
each share of the Company's issued and outstanding stock prior to the merger
was converted into the right to receive $14.50 cash, and the Company became
a wholly-owned subsidiary of Port Royal. The Company prior to the Acquisition
is referred to herein as the "Pre-Merger Company." The Company after the
Acquisition is referred to as the "Post-Merger Company."
The purchase price for the Acquisition was funded through (i) a $35 million
equity contribution from Port Royal funded by a private equity placement,
(ii) borrowings under a revolving credit facility of $25 million with SunTrust
Bank, Atlanta, N.A., as agent and (iii) the sale of the Company's 10.25%
senior notes due 2007 in the aggregate principal amount of $100 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation --
The consolidated statements of operations, statements of shareholders' equity,
and statements of cash flows for the three and six months ended June 29, 1997
were prepared using the Pre-Merger Company's historical basis of accounting.
The accompanying comparative consolidated financial statements as of and for
the three and six months ended June 28, 1998 were prepared under a new basis
of accounting that reflects the preliminary allocation of the fair value of
assets acquired and liabilities assumed, the related financing and acquisition
costs and all debt incurred in connection with the acquisition of Krystal by
Port Royal. Accordingly, the consolidated financial statements for periods
prior to September 29, 1997, including the financial statements as of
June 29, 1997 included herein, are not comparable to consolidated financial
statements on or subsequent to September 29, 1997. A black line on the
accompanying consolidated financial statements distinguishes between the
Pre-Merger and Post-Merger Company. Because the consolidated balance sheets
presented herein as of June 28, 1998 and December 28, 1997 are both prepared
as of dates subsequent to September 29, 1997, both balance sheets reflect the
post-merger basis of accounting.
Principles of Consolidation --
The accompanying consolidated financial statements include the accounts of
The Krystal Company and Krystal Aviation Co. (herein after referred to
collectively as The "Company"). All significant intercompany balances and
transactions have been eliminated.
Cash and Temporary Investments --
For purposes of the consolidated statements of cash flows, the Company
considers repurchase agreements and other temporary cash investments with a
maturity of three months or less to be temporary investments.
Inventories --
Inventories are stated at cost and consist primarily of food, paper products
and other supplies. Prior to the acquisition of Krystal by Port Royal, the
Company used the last-in, first-out (LIFO) method of accounting for a
substantial portion of its inventories. Effective September 29, 1997, the
Company changed to the first-in, first-out (FIFO) method. The change in
accounting principle was made primarily to reflect inventory on the
consolidated balance sheet at a value that more closely represents current
cost at the date of the acquisition and merger. This accounting change
was not material to the financial statements on an annual or quarterly
basis, and accordingly, no retroactive restatement of prior years' financial
statements was made.
Property, Buildings and Equipment --
Prior to September 29, 1997, property, buildings and equipment are stated at
cost. Effective with the acquisition by Port Royal, property, buildings and
equipment were adjusted to their estimated fair values.
Expenditures which materially increase useful lives are capitalized, whereas
ordinary maintenance and repairs are expensed as incurred. Depreciation
of fixed assets is computed using the straight-line method for financial
reporting purposes and accelerated methods for tax purposes over the estimated
useful lives of the related assets as follows:
Buildings and improvements 10 - 39 years
Equipment 3 - 10 years
Leaseholds Life of lease up to 20 years
Long-lived assets --
The Company periodically evaluates the carrying value of long-lived assets
to be held and used when events or changes in circumstances warrant such a
review. The carrying value of a long-lived asset is considered impaired
when the projected undiscounted future cash flow of such asset is less than
its carrying value.
Intangibles --
The consolidated balance sheet of the Post-Merger Company includes the
preliminary allocation of purchase accounting goodwill of $49,157,000 and
deferred financing costs of $5,597,000. Intangibles are amortized on a
straight-line basis over 10 to 25 years. Amortization expense for goodwill
and deferred financing costs for the three months ended June 28, 1998 was
$491,000 and $208,000, and was $986,000 and $412,000 for the six months
ended June 28, 1998,respectively.
Franchise and License Agreements --
Franchise or license agreements are entered for single and multi-unit
restaurants. The multi-unit agreement establishes the number of restaurants
the franchisee or licensee is to construct and open in the franchised area
during the term of the agreement.
Franchisees and licensees are required to pay the Company a franchise or
license fee and a weekly royalty and service fee of either 4.5% or 6.0%
of the restaurants' gross receipts depending on the duration of the franchise
agreement. Unit franchise and license fees are recorded as income as
related restaurants begin operations. Royalty and service fees, which are
based on restaurant sales of franchisees and licensees, are accrued as earned.
Franchise fees received prior to the opening of the restaurant are deferred
and included in accrued liabilities on the consolidated balance sheets.
Fair market value of financial instruments --
Unless otherwise indicated elsewhere in the notes to the consolidated
financial statements, the carrying values of the Company's financial
instruments approximate their fair values.
Use of Estimates --
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. SETTLEMENT OF DEFERRED COMPENSATION OBLIGATIONS
During the first half of 1998, the Company agreed to settle its obligations
under certain deferred compensation plans by making lump sum cash payments to
two retired executives. The Company realized a gain of $925,000 from this
transaction. The cash payments were funded with the proceeds from
redeeming the cash surrender value of life insurance policies on the lives of
the retired executives. Also during the first half of 1998, the Company
realized a gain of $880,000, of which $350,000 was realized in the second
quarter, related to the receipt of life insurance proceeds in excess of cash
surrender value.
4. PETITION FOR RELIEF UNDER CHAPTER 11
On December 15, 1995, Krystal filed a voluntary petition under Chapter
11 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the Eastern District of Tennessee for the purpose
of completely and finally resolving the various claims filed against the
Company by current and former employees alleging violations of the Fair
Labor Standards Act of 1938 (FLSA).
In early 1997, Krystal and the majority of the FLSA plaintiffs reached a
settlement providing for the payment of the FLSA claims and related legal
costs. A plan of reorganization (the "Plan") was formally filed on
February 24, 1997. On April 10, 1997, the Bankruptcy Court confirmed the
Company's plan of reorganization and on April 23, 1997, the Plan became
final resulting in the dismissal of the FSLA claims.
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
BASIS OF ACCOUNTING
-------------------
On September 26, 1997 (effective September 29, 1997 for accounting purposes)
the Company was acquired by, and merged with a wholly-owned Subsidiary
of, Port Royal. The acquisition and merger were accounted for using the
purchase method of accounting. As a result, the period consisting of the
three and six months ended June 28, 1998 is not fully comparable to the
three and six months ended June 29, 1997.
Comparison of the Three Months Ended June 28, 1998
---------------------------------------------------
to the Three Months Ended June 29, 1997
----------------------------------------
CASH OPERATING PROFIT
---------------------
Cash operating profit (net income before interest, taxes, depreciation,
and other non-operating gains, losses or expenses) is one of the key
standards used by the Company to measure operating performance. Cash
operating profit is used to supplement operating income as an indicator of
operating performance and cash flows from operating activities as a measure
of liquidity, and not as an alternative to measures defined and required by
generally accepted accounting principles.
Cash operating profit for the three months ended June 28, 1998 increased
$500,000 to $5.8 million compared to $5.3 million in the same period in 1997.
The 9.4% increase in cash operating profit is primarily attributable to
management's efforts to reduce overall operating costs of the Company. The
results of these efforts are reflected primarily in the reduction in general
and administrative costs as a percentage of revenues. In addition, management
believes it has also made significant improvements in restaurant operations,
which will further reduce overall restaurant operating costs throughout fiscal
1998.
RESULTS OF OPERATIONS
---------------------
Total revenues decreased 2.81% to $61.5 million for the second quarter of
1998 compared to $63.3 million for the same period of 1997.
Restaurant sales decreased to $59.2 million in the second quarter of 1998 from
$61.2 million in the same period of 1997. The Company operated 244 restaurants
at the end of the second quarter of 1998 compared to 249 at the end of the
second quarter of 1997. Company-owned average same restaurant sales for the
second quarter of 1998 were $242,000 compared to $248,000 for the same
period in 1997, a decrease of 2.5%. The average customer check for
Company-owned restaurants (both full service and double drive-thru) for the
second quarter of 1998 was $3.89 as compared to $3.79 in the same period of
1997, an increase of 2.6%. The increase was due to product price increases
of approximately 2.1% in the second quarter of 1998 over the same period in
1997, and the introduction of new menu combinations which increased the
average customer check. The effect of price increases was partially offset
by a reduction in average customer count per restaurant day. Customer counts
per restaurant day decreased to 683 in the second quarter of 1998 compared to
708 in the same period of 1997. Key factors in the reduction of customer
counts include heavy promotional activity by certain competitors and, to a
lesser degree the elimination of certain menu items in the second quarter
of 1998.
Franchise fees and royalties increased $118,000 to $1,023,000 in the second
quarter of 1998 versus the same period in 1997. The increase in
franchise fees and royalties resulted from the increase in franchised
restaurants. The franchise system consisted of 109 restaurants at the end
of the second quarter of 1998 compared to 93 at the end of the second
quarter of 1997.
Other revenue, which comes from the Company's aviation subsidiary, was
$1.3 million in the second quarter of 1998 versus $1.2 million for the
second quarter of 1997.
Cost of restaurant sales decreased $1.1 million, approximately 2.3%, to
$48.9 million in the second quarter of 1998, from $50.0 million in the same
period of 1997. Cost of restaurant sales as a percentage of restaurant sales
increased to 82.6% in the second quarter of 1998 from 81.7% in the same period
of 1997. Total food and paper costs were $17.9 million in the second quarter
of 1998 as compared to $19.8 million in the second quarter of 1997. Food and
paper costs as a percentage of restaurant sales decreased to 30.3% in the
second quarter of 1998 as compared to 32.3% in the same period of 1997.
Direct labor cost in the second quarter of 1998 was $13.8 million compared
to $13.4 million in the same period of 1997. Direct labor as a percent of
restaurant sales was 23.3% in the second quarter of 1998 compared to 21.9% for
the second quarter of 1997. The increase in direct labor costs as a percentage
of restaurant sales resulted from a 5.4% increase in the minimum wage,
effective September 1, 1997, which could not be fully offset by price
increases. Other restaurant labor cost as a percentage of restaurant sales
decreased to 7.4% in the second quarter of 1998 from 7.9% in the same period
of 1997.
Depreciation and amortization expenses increased $540,000, approximately
20.2%, to $3.2 million in the second quarter of 1998 as compared to $2.7
million for the same period in 1997. The increase in the second quarter
of 1998 is due to amortization of goodwill, financing costs and transaction
costs associated with the acquisition and merger of the Company with Port
Royal on September 26, 1997.
General and administrative expenses decreased by $1.1 million, approximately
15.7%, to $6.0 million in the second quarter of 1998 compared to $7.1 million
in the same period for 1997. The decrease in general and administrative
expense resulted from overall reductions in expenditures related to corporate
office activities. These reductions resulted from management's ongoing efforts
to restructure and streamline the management structure of the Company. The
single largest area of expense reduction is administrative salaries which
declined $0.5 million to $1.7 million in the second quarter of 1998, compared
to $2.2 million in the same period of 1997. Other areas of cost reduction
included auto expense, corporate office rent and transportation costs.
In accordance with Statement of Position 90-7, Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code, issued by the American Institute
of Certified Public Accountants, the Company expensed Reorganization Items as
incurred. No such expenses were incurred during the second quarter of 1998
compared to $343,000 for the second quarter of 1997.
During the first quarter of 1998, the Company agreed to settle its obligations
under certain deferred compensation plans by making lump sum cash payments to
two retired executives. The cash payments were funded with the proceeds from
redeeming the cash surrender value of life insurance policies on the lives of
the retired executives. Also during the second quarter of 1998, the Company
realized a gain of $350,000 related to the receipt of life insurance proceeds
in excess of cash surrender value.
Contractual rate interest expense for the second quarter of 1998 increased
$1.9 million to $2.9 million as compared to $958,000 for the second quarter
of 1997. The interest expense increase is due to a $62.7 million increase
in long term debt to $100.2 million at the end of the second quarter 1998
compared to $37.5 million at the end of the second quarter 1997.
Provision for income taxes was $240,000 for the second quarter of 1998 as
compared to an income tax expense of 676,000 for the same period in 1997.
The effective income tax rate of 153.0% in 1998 is more than the statutory
income tax rate primarily as a result of non-deductible amortization
associated with acquisition-related goodwill. The effective income tax rate
of 38.0% for the second quarter of 1997 approximates the combined statutory
federal and state income tax rates.
Comparison of the Six Months Ended June 28, 1998
------------------------------------------------
to the Six Months Ended June 29, 1997
-------------------------------------
CASH OPERATING PROFIT
---------------------
Cash operating profit for the six months ended June 28, 1998 increased $1.6
million to $11.1 million compared to $9.5 million in the same period in 1997.
The 16.8% increase in cash operating profit is primarily attributable to
management's efforts to reduce overall operating costs of the Company. The
results of these efforts are reflected primarily in the reduction in general
and administrative costs as a percentage of revenues. In addition, management
believes it has also made significant improvements in restaurant operations,
which will further reduce overall restaurant operating costs throughout fiscal
1998.
RESULTS OF OPERATIONS
---------------------
Total revenues decreased 1.08% to $121.2 million for the first six months of
1998 compared to $122.5 million for the same period of 1997.
Restaurant sales decreased to $116.7 million in the first six months of 1998
from $118.5 million in the same period of 1997. The Company operated 244
restaurants at the end of the second quarter of 1998 compared to 249 at the
end of the second quarter of 1997. Company-owned average same restaurant
sales for the first six months of 1998 were $477,000 compared to $481,000 for
the same period in 1997, a decrease of 0.9%. The average customer check for
Company-owned restaurants (both full service and double drive-thru) for the
first six months of 1998 was $3.86 as compared to $3.75 in the same period of
1997, an increase of 2.9%. The increase was due to product price increases
of approximately 2.4% in the first half of 1998 over the same period in
1997, and the introduction of new menu combinations which increased the
average customer check. The effect of price increases was partially offset
by a reduction in average customer count per restaurant day. Customer counts
per restaurant day decreased to 673 in the first six months of 1998 compared
to 691 in the same period of 1997. Key factors in the reduction in customer
counts include heavy second quarter promotion activity by certain competitors
and to a lesser degree, the elimination of certain menu items from the
restaurants during the second quarter of 1998.
Franchise fees and royalties increased $328,000 to $2.0 million in the first
six months of 1998 versus the same period in 1997. The increase in
franchise fees and royalties resulted from the increase in franchised
restaurants. The franchise system consisted of 109 restaurants at the end
of the first six months of 1998 compared to 93 at the end of the first
six months of 1997.
Other revenue, which comes from the Company's aviation subsidiary, was
$2.5 million in the first six months of 1998 compared to $2.4 in the first
six months of 1997.
Cost of restaurant sales decreased $898,000, approximately 0.9%, to
$96.6 million in the first six months of 1998, from $97.5 million in the same
period of 1997. Cost of restaurant sales as a percentage of restaurant sales
increased to 82.8% in the first six months of 1998 from 82.3% in the same
period of 1997. Total food and paper costs were $35.7 million in the first
six months of 1998 as compared to $38.1 million in the first six months of
1997. Food and paper costs as a percentage of restaurant sales decreased to
30.6% in the first six months of 1998 as compared to 32.2% in the same period
of 1997. Direct labor cost in the first half of 1998 was $27.2 million as
compared to $26.3 million in the same period of 1997. Direct labor as a
percent of restaurant sales was 23.3% in the first six months of 1998 compared
to 22.2% for the first six months of 1997. The increase in direct labor costs
as a percentage of restaurant sales resulted from a 5.4% increase in the
minimum wage, effective September 1, 1997, which could not be fully offset by
price increases. Other restaurant labor cost as a percentage of restaurant
sales decreased to 7.6% in the first half of 1998 from 8.1% in the same period
of 1997.
Depreciation and amortization expenses increased $1.1 million, approximately
21.7%, to $6.4 million in the first six months of 1998 as compared to $5.3
million for the same period in 1997. The increase in the first six months
of 1998 is due to amortization of goodwill, financing costs and transaction
costs associated with the acquisition and merger of the Company with Port
Royal on September 26, 1997.
General and administrative expenses decreased by $1.9 million, approximately
14.1%, to $11.9 million in the first six months of 1998 compared to $13.8
million in the same period for 1997. The decrease in general and
administrative expense resulted from overall reductions in expenditures related
to corporate office activities. These reductions resulted from management's
ongoing efforts to restructure and streamline the management structure of the
Company. The single largest area of expense reduction is administrative
salaries which declined $614,000 to $3.4 million in the first six months of
1998, compared to $4.1 million in the same period of 1997. Other areas of
cost reduction include auto expense, corporate office rent and transportation
costs.
In accordance with Statement of Position 90-7, Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code, issued by the American Institute
of Certified Public Accountants, the Company expensed Reorganization Items as
incurred. No such expenses were incurred during the first six months of 1998
compared to $1.1 million for the first six months of 1997.
During the first half of 1998, the Company agreed to settle its obligations
under certain deferred compensation plans by making lump sum cash payments to
two retired executives. The Company realized a gain of $925,000 from this
transaction. The cash payments will be funded with the proceeds from
redeeming the cash surrender value of life insurance policies on the lives of
the retired executives. Also during the first half of 1998, the Company
realized a gain of $880,000 related to the receipt of life insurance proceeds
in excess of cash surrender value.
Contractual rate interest expense for the first six months of 1998 increased
$3.8 million to $5.7 million as compared to $1.9 million for the first six
months of 1997. The interest expense increase is due to a $62.7 million
increase in long term debt to $100.2 million at the end of the first half of
1998 compared to $37.5 million at the end of the first half of 1997.
Provision for income taxes was $662,000 for the first six months of 1998 as
compared to $649,000 for the same period in 1997. The effective income tax
rate of 82.0% in 1998 is more than the statutory income tax rate primarily
as a result of non-deductible amortization associated with acquisition-related
goodwill. The effective income tax rate of 38.0% for the first six months of
1997 approximates the combined statutory federal and state income tax rates.
The Company recorded a loss of $220,000, net of tax benefit, in the first
six months of 1997 related to the early extinguishment of debt.
<TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
KEY OPERATING STATISTICS
(Dollars in thousands except average check)
<CAPTION>
Post-Merger|Pre-Merger Post-Merger|Pre-Merger
Company | Company Company | Company
-----------| ---------- ----------| ----------
For the three For the six
months ended, months ended,
----------------- -----------------
June 28,| June 29, June 28, | June 29,
1998 | 1997 1998 | 1997
-------| -------- -------- |--------
<S> <C> | <C> <C> |<C>
Restaurant Sales $59,186 | $61,220 $116,664 |$118,484
Percent change (3.32%) | (1.54%) |
| |
Same restaurant sales $59,100 | $60,623 $116,272 |$117,330
Percent change (2.51%) | (0.90%) |
| |
Average sales per restaurant $ 242 | $ 246 $ 475 |$ 476
Percent change (1.62%) | (0.21%) |
| |
Customer count per day 683 | 708 673 | 691
Percent change (3.53%) | (2.60%) |
| |
Average check $ 3.89 | $ 3.79 $ 3.86 |$ 3.75
Percent change 2.64% | 2.93% |
| |
Number of restaurants: | |
Company owned 244 | 249 244 | 249
Franchised 109 | 93 109 | 93
| |
Cost of restaurant sales $48,905 | $50,032 $ 96,617 |$ 97,515
As a percent of restaurant sales 82.64% | 81.75% 82.83% | 82.33%
| |
Food and paper cost $17,915 | $19,777 $ 35,651 |$ 38,115
As a percent of restaurant sales 30.27% | 32.30% 30.56% | 32.17%
| |
Direct labor $13,786 | $13,422 $ 27,191 |$ 26,262
As a percent of restaurant sales 23.29% | 21.92% 23.31% | 22.17%
| |
Other labor costs $ 4,364 | $ 4,810 $ 8,897 |$ 9,583
As a percent of restaurant sales 7.37% | 7.86% 7.63% | 8.09%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company does not maintain significant inventory or accounts receivables
since substantially all of its restaurants' sales are for cash. Like many
restaurant businesses, the Company receives several weeks of trade credit in
purchasing food and supplies. The Company's receivables from franchisees are
closely monitored and collected weekly. The Company normally operates with
working capital deficits (current liabilities exceeding current assets) and
had a working capital deficit of $14.5 million at June 28, 1998,compared to a
working capital deficit of $4.3 million at June 29, 1997. During the first
six months of 1998, the Company redeemed the cash surrender value of certain
insurance policies on the lives of retired executives. Amounts received
under these policies totaled $6.0 million and were used to settle deferred
compensation plans for two former executives and to reduce long term debt.
Capital expenditures totaled approximately $3.8 million in the first six
months of 1998 compared to $3.9 million for the same period in 1997. The
Company opened no new restaurants during the first six months of 1998 nor
during the same period in 1997. Approximately $15.8 million is budgeted for
capital expenditures during the remainder of 1998. Capital expenditures are
budgeted for the construction of 5 restaurants to open in 1998, construction
and/or land acquisition for 13 restaurants to open in 1999, refurbishment of
certain restaurants and ongoing capital improvements.
At June 28, 1998, the Company had available cash of approximately $560,000,
receivables of $1.4 million, and an income tax receivable of $4.8 million and
availability under its credit line of $21.4 million. Management believes
these funds and funds from operations will be sufficient to meet its operating
requirements, anticipated capital expenditures and other obligations for the
foreseeable future.
YEAR 2000
---------
The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. Software failures due
to processing errors potentially arising from calculations using the year
2000 date are a known risk. The Company has developed a plan to ensure its
systems are compliant with the requirements to process transactions in the
year 2000. The majority of the Company's internal information systems is
to be replaced with fully compliant new systems. The total cost of the
software and implementation is estimated to be $2,000,000 to $2,250,000,
which will be capitalized as incurred. The actual cash payments will be
made in 1998 as the implementation is expected to be completed.
The Company does not currently have any information concerning the year
2000 compliance status of its suppliers. In the event that any of the
Company's significant suppliers does not successfully and timely achieve
year 2000 compliance, the Company's business or operations could be
adversely affected.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits-
Exhibit-27 Financial Data Schedule is filed with this 10-Q.
(b) Reports on Form 8-K-
No Form 8-K was filed by the registrant during the second quarter
of 1998.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
THE KRYSTAL COMPANY
(Registrant)
Dated: 8/07/98 /s/Larry D. Bentley
- -------------- ------------------------
Larry D. Bentley
(Vice President and Chief Financial
and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> JUN-28-1998
<CASH> 560
<SECURITIES> 0
<RECEIVABLES> 6246
<ALLOWANCES> 0
<INVENTORY> 1957
<CURRENT-ASSETS> 12933
<PP&E> 110834
<DEPRECIATION> 11039
<TOTAL-ASSETS> 175975
<CURRENT-LIABILITIES> 27388
<BONDS> 0
0
0
<COMMON> 35000
<OTHER-SE> (394)
<TOTAL-LIABILITY-AND-EQUITY> 175975
<SALES> 116664
<TOTAL-REVENUES> 121171
<CGS> 96617
<TOTAL-COSTS> 96617
<OTHER-EXPENSES> 1623
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5607
<INCOME-PRETAX> 807
<INCOME-TAX> 662
<INCOME-CONTINUING> 145
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 145
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
