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 July 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from to
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Commission file number 333-40933
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THE KRYSTAL COMPANY
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(Exact name of registrant as specified in its charter)
TENNESSEE 62-0264140
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(State or other jurisdiction of (IRS Employer identification
incorporation or organization) Number)
One Union Square, Chattanooga, TN 37402
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(Address of principal executive offices, including zip code)
(423) 757-1550
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
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This report is filed by the Company pursuant to Section 15(d) of the
Securities Exchange Act of 1934. The Company has 100 shares of common
stock outstanding held of record by Port Royal Holdings, Inc. as of
August 11, 2000.
THE KRYSTAL COMPANY
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July 2, 2000
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PART I. FINANCIAL INFORMATION
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The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading. These condensed financial
statements should be read in conjunction with the Company's latest
annual report on Form 10-K.
In the opinion of management of the Company, all adjustments necessary to
present fairly (1) the financial position of The Krystal Company and
Subsidiary as of July 2, 2000 and January 2, 2000, and (2) their change
in shareholder's equity for the six months ending July 2, 2000 and (3) the
results of their operations and their cash flows for the six months ended
July 2, 2000 and July 4, 1999 and (4) the results of their operations for
the three months ended July 2, 2000 and July 4, 1999 have been included.
The results of operations for the interim period ended July 2, 2000 are not
necessarily indicative of the results for the full year.
Certain written and oral statements made by or on behalf of the Company may
constitute "forward-looking" statements as defined under the Private
Securities Litigation Reform Act of 1995 are contained in this 10-Q. These
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from the Company's historical experience
and its present expectations or projections. These risks and uncertainties
include, but are not limited to, unanticipated economic changes, interest rate
movements, changes in governmental policies, including such problems at the
Company's vendors, counterparties and customers, and the impact of competition.
The Company cautions that such factors are not exclusive. Caution should be
taken not to place undue reliance on any such forward-looking statements since
such statements speak only as of the date of the making of such statements and
are based on certain expectations and estimates of the Company which are
subject to risks and changes in circumstances that are not within the Company's
control. The information provided herein should be read in conjunction with
information provided in the Company's Form 10-K for the fiscal year ended
January 2, 2000.
PART I. FINANCIAL INFORMATION
-----------------------------
Item I. Financial Statements
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS
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(In thousands) (Unaudited)
July 2, January 2,
2000 2000
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ASSETS
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CURRENT ASSETS:
Cash and temporary investments $ 5,269 $ 5,302
Receivables, net 1,190 1,382
Inventories 1,839 2,099
Deferred income taxes 2,843 2,843
Prepayments and other 823 1,090
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Total current assets 11,964 12,716
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PROPERTY, BUILDINGS, AND EQUIPMENT, net 129,093 117,492
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LEASED PROPERTIES, net 10,645 10,518
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OTHER ASSETS:
Prepaid pension asset 8,251 8,144
Deferred financing cost, net 3,498 3,754
Goodwill, net 44,433 45,432
Other 1,307 455
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Total other assets 57,489 57,785
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TOTAL ASSETS $209,191 $198,511
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See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS (CONTINUED)
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(In thousands) (Unaudited)
July 2, January 2,
2000 2000
LIABILITIES AND SHAREHOLDER'S EQUITY ----------- ----------
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CURRENT LIABILITIES:
Accounts payable $ 9,141 $ 7,482
Accrued liabilities 21,117 24,110
Outstanding checks in excess of
bank balance 859 3,701
Current portion of long-term debt 133 53
Current portion of capital
lease obligations 1,821 1,745
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Total current liabilities 33,071 37,091
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LONG-TERM DEBT, excluding current portion 119,046 102,623
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CAPITAL LEASE OBLIGATIONS, excluding
current portion 9,660 9,467
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DEFERRED INCOME TAXES 10,869 9,828
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OTHER LONG-TERM LIABILITIES 1,270 1,152
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SHAREHOLDER'S EQUITY:
Common stock, without par value;
100 shares authorized; issued
and outstanding, at July 2, 2000,
and at January 2, 2000 35,000 35,000
Retained earnings 275 3,350
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Total shareholder's equity 35,275 38,350
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TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $209,191 $198,511
======== ========
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF OPERATIONS
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(In thousands)(Unaudited)
For the Three For the Six
Months Ended Months Ended
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July 2, July 4, July 2, July 4,
2000 1999 2000 1999
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REVENUES:
Restaurant sales $66,439 $64,747 $128,094 $127,995
Franchise fees 260 110 325 110
Royalty revenue 1,250 1,098 2,316 2,141
Other revenue 1,814 1,403 3,393 2,759
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69,763 67,358 134,128 133,005
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COST AND OTHER EXPENSES:
Cost of restaurant sales 55,489 52,504 109,882 104,108
Depreciation and amortization
expenses 3,676 3,263 7,333 6,438
General and administrative
expenses 6,410 6,967 13,019 13,359
Other expenses, net 1,191 832 2,274 1,626
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66,766 63,566 132,508 125,531
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OPERATING INCOME 2,997 3,792 1,620 7,474
INTEREST EXPENSE, net (3,003) (2,606) (5,934) ( 5,151)
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INCOME (LOSS) BEFORE (PROVISION FOR)
BENEFIT FROM INCOME TAXES ( 6) 1,186 (4,314) 2,323
(PROVISION FOR) BENEFIT FROM
INCOME TAXES ( 175) ( 673) 1,239 ( 1,335)
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NET INCOME (LOSS) $ ( 181) $ 513 $ (3,075) $ 988
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See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
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FOR THE SIX MONTHS ENDED
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July 2, 2000
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(In thousands)
(Unaudited)
Common Retained
Stock Earnings
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BALANCE, January 2, 2000 $35,000 $ 3,350
Net loss - ( 3,075)
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BALANCE, July 2, 2000 $35,000 $ 275
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See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(In thousands)
(Unaudited)
For The Six Months Ended
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July 2, July 4,
2000 1999
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OPERATING ACTIVITIES:
Net income (loss) $(3,075) $ 988
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities-
Depreciation and amortization 7,333 6,438
Change in deferred taxes 1,041 ( 357)
Changes in operating assets and
liabilities:
Receivables, net 192 1,106
Inventories 260 99
Prepayments and other 267 ( 1,632)
Accounts payable 1,659 ( 1,386)
Outstanding checks in excess of
bank balance ( 2,842) -
Income taxes payable - 888
Accrued liabilities ( 2,993) 842
Other, net ( 510) 458
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Net cash provided by
operating activities 1,332 7,444
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INVESTING ACTIVITIES:
Additions to property, buildings,
and equipment (21,300) ( 8,458)
Proceeds from sale of property,
buildings, and equipment 4,296 2,192
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Net cash used in investing activities (17,004) ( 6,266)
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FINANCING ACTIVITIES:
Proceeds from borrowing 17,000 90
Repayments of long-term debt ( 497) ( 31)
Principal payments of
capital lease obligations ( 864) ( 246)
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Net cash provided by (used in)
financing activities 15,639 ( 187)
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NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS ( 33) 991
CASH AND TEMPORARY INVESTMENTS,
beginning of period $ 5,302 $ 9,012
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CASH AND TEMPORARY INVESTMENTS,
end of period $ 5,269 $10,003
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 6,237 $ 5,348
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Income taxes $ 670 $ 1,896
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See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activities --
The Krystal Company (a Tennessee corporation) ("Krystal") is engaged primarily
in the development, operation and franchising of quick-service restaurants in
the southeastern United States. Krystal's wholly-owned subsidiary, Krystal
Aviation Co. ("Aviation") operates a fixed base airport hangar operation in
Chattanooga, Tennessee. Aviation's revenues provide less than 3% of the
Company's total revenues.
Principles of Consolidation --
The accompanying consolidated financial statements include the accounts of
Krystal and Aviation (herein after referred to collectively as the "Company").
All significant intercompany balances and transactions have been eliminated.
Cash and temporary investments --
For purposes of the consolidated statements of cash flows, the Company considers
repurchase agreements and other temporary cash investments with a maturity of
three months or less to be temporary investments.
Inventories --
Inventories are stated at cost and consist primarily of food, paper products and
other supplies.
Property, Buildings, and Equipment --
Expenditures, which materially increase useful lives, are capitalized, whereas
ordinary maintenance and repairs are expensed as incurred. Depreciation of
fixed assets is computed using the straight-line method for financial reporting
purposes and accelerated methods for tax purposes over the estimated useful
lives of the related assets as follows:
Buildings and improvements 10-39 years
Equipment 3-10 years
Leaseholds Life of lease up to 20 years
Long-lived assets --
The Company periodically evaluates the carrying value of long-lived assets to be
held and used when events or changes in circumstances warrant such a review.
The carrying value of a long-lived asset is considered impaired when the
projected undiscounted future cash flow of such asset is less than its carrying
value.
Intangibles --
The consolidated balance sheet includes the allocation of purchase accounting
goodwill of $49,910,000 and deferred financing costs of $5,734,000 at July 2,
2000. 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 July 2, 2000 was $499,300 and $181,400, respectively and for the
three months ended July 4, 1999 was $499,300 and $205,500, respectively.
Amortization expense for goodwill and deferred financing costs for the six
months ended July 2, 2000 was $998,500 and $386,900, respectively and for the
six months ended July 4, 1999 was $998,500 and $411,000, respectively.
Accumulated amortization of goodwill at July 2, 2000 and July 4, 1999 was
$5,477,000 and $3,480,000, respectively. Accumulated amortization of deferred
financing costs at July 2, 2000 and July 4, 1999 was $2,236,500 and
$1,438,500, respectively.
Franchise and License Agreements --
Franchise or license agreements are available for single and multi-unit
restaurants. The multi-unit agreement establishes the number of restaurants the
franchisee or licensee is to construct and open in the franchised area during
the term of the agreement. At July 2, 2000, there were 127 franchise
or licensed restaurants and at July 4, 1999, there were 113 franchised or
licensed restaurants.
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 and type 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.
Use of estimates --
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. SUMMARIZED FINANCIAL INFORMATION - SUBSIDIARY GUARANTORS
The senior notes described in Note 3 are guaranteed by each of the Company's
subsidiaries. The subsidiary guarantors are wholly owned and the guarantees
are full, unconditional, joint and several obligations of each of the
subsidiary guarantors. Summarized financial information for the subsidiary
guarantors is set forth below. Separate financial statements for the
subsidiary guarantors of the Company are not presented because the Company has
determined that such financial statements would not be material to investors.
The subsidiary guarantors comprise all of the direct and indirect subsidiaries
of the Company, other than the non-guarantor subsidiaries which individually,
and in the aggregate, are inconsequential. There are no restrictions on the
ability of the subsidiary guarantors to declare dividends, or make loans or
advances to the Company.
The following table presents summarized financial information for subsidiary
guarantors in connection with all of the Company's 10.25% Senior Subordinated
Notes:
July 2, January 2,
2000 2000
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(in thousands)
Balance Sheet Data:
Current assets $ 572 $ 470
Noncurrent assets $4,893 $3,475
Current liabilities $ 531 $ 985
Non current liabilities $1,951 $ 138
For the Six Months Ended
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July 2, July 4,
2000 1999
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(in thousands)
Income Statement Data:
Net sales $3,393 $2,759
Gross profit $ 912 $ 944
Income before provision for Federal
and state income taxes $ 585 $ 735
Net income $ 362 $ 456
3. INDEBTEDNESS
Revolving Credit Agreement:
The Company has in place a credit facility with a bank for $25 million
(the "Credit Facility") which matures in May, 2003. Borrowings under the
Credit Facility bear interest rates, at the option of the Company, equal to
either: (a) the greater of the prime rate, or the federal funds rate plus
0.5%, plus a margin of 0.5%; or (b) the rate offered in the Eurodollar market
for amounts and periods comparable to the relevant loan, plus a margin (which
changes from 0.75% to 3.5%) that is determined by certain financial covenants.
The weighted average interest rate on borrowings under the Credit Facility at
July 2, 2000 was 9.4%. Availability under the Credit Facility as of
July 2, 2000 is $5.6 million.
The Credit Facility contains restrictive covenants including, but not limited
to: (a) the Company's required maintenance of minimum levels of tangible net
worth; (b) limitations regarding additional indebtedness; (c) the Company's
required maintenance of a minimum amount of fixed charges coverage; and
(d) limitations regarding liens on assets. Additionally, the Credit Facility
contains a provision that, in the event of a defined change of control, the
Credit Facility will be terminated. As of July 2, 2000, and for the quarter
then ended, the Company was in compliance with, or had obtained waivers for,
all loan covenants.
Senior Notes:
In September, 1997, the Company issued $100 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 by Port
Royal.
4. CONTINGENCIES
On September 21, 1999, the Company was named as a defendant in a lawsuit filed
in the Northern District of Alabama (Michael Jones vs. The Krystal Company)
alleging that the plaintiff was denied access to the restrooms in one of the
Company's restaurants in violation of the Americans with Disabilities Act.
The lawsuit seeks class action status on behalf of all wheelchair bound patrons
of the Company's restaurants who have been denied access to restrooms. The
Company and plaintiff's counsel have tentatively agreed to a settlement of this
lawsuit. The Company's legal counsel and plaintiff's counsel are in the
process of negotiating the proposed settlement agreement, which must also be
submitted to the federal district court for approval. Under the terms of the
proposed settlement the Company will commit to renovate the restrooms in its
restaurants that are not handicap accessible in exchange for the dismissal of
the lawsuit.
The Company is party to various other 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 2. Management's Discussion and Analysis of Financial
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Condition and Results of Operations
-----------------------------------
The following table reflects certain key operating statistics which impact the
Company's financial results:
KEY OPERATING STATISTICS
(Dollars in thousands except average check)
For the Three For the Six
Months Ended Months Ended
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July 2, July 4, July 2, July 4,
2000 1999 2000 1999
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SYSTEMWIDE RESTAURANT SALES $ 92,053 $87,045 $175,576 $170,758
Percent change 5.75% 2.82%
COMPANY RESTAURANT STATISTICS:
Number of restaurants 260 244 260 244
Restaurant sales $66,439 $64,747 $128,094 $127,995
Percent change 2.61% 0.08%
Percent change in
same restaurant sales ( 3.25%) 9.05% ( 4.82%) 9.50%
Transactions per day 620 687 617 687
Percent change ( 9.75%) (10.19%)
Average check $ 4.60 $ 4.29 $ 4.49 $ 4.23
Percent change 7.23% 6.15%
Selected components are --
Cost of restaurant sales $55,489 $52,504 $109,882 $104,108
As a percent of restaurant sales 83.51% 81.09% 85.77% 81.33%
Food and paper cost $21,771 $19,988 $ 41,580 $ 39,345
As a percent of restaurant sales 32.77% 30.87% 32.46% 30.74%
Direct labor $15,445 $15,057 $ 31,455 $ 29,576
As a percent of restaurant sales 23.25% 23.26% 24.56% 23.11%
Other labor costs $ 5,006 $ 4,880 $ 10,281 $ 9,934
As a percent of restaurant sales 7.54% 7.54% 8.03% 7.76%
FRANCHISE SYSTEM STATISTICS:
Number of restaurants 127 113 127 113
Restaurant sales $25,615 $22,298 $ 47,482 $ 42,763
Percent change 14.88% 11.04%
Percent change in same
restaurant sales 0.51% 10.21% (0.86%) 10.03%
Transactions per day 483 496 467 485
Percent change (2.62%) (3.71%)
Average check $ 4.71 $ 4.45 $ 4.61 $ 4.38
Percent change 5.84% 5.25%
Comparison of the Three Months Ended July 2, 2000
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to the Three Months Ended July 4, 1999
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CASH OPERATING PROFIT
---------------------
Cash operating profit (net income before interest, taxes, depreciation and
amortization, and other non-operating gains, losses or expenses) is one of the
key standards used by the Company to measure operating performance. Cash
operating profit is used to supplement operating income as an indicator of
operating performance and cash flows from operating activities as a measure of
liquidity, and not as an alternative to measures defined and required by
generally accepted accounting principles.
Cash operating profit for the three months ended July 2, 2000 decreased
$382,000 to $6.7 million (9.6% of revenues) compared to $7.1 million (10.5% of
revenues) for the three months ended July 4, 1999. The decrease in cash
operating profit was primarily attributable to a decrease in same
restaurant sales and to an increase in the wholesale cost of food and paper
and was offset in part by general and administrative expenses.
RESULTS OF OPERATIONS
---------------------
Total Krystal system (Company and Franchise combined) restaurant sales for the
three months ended July 2, 2000 increased 5.75% to $92.1 million compared to
$87.0 million for the same period last year.
Total Company revenues increased 3.6% to $69.8 million in the three months
ended July 2, 2000 compared to $67.4 million in the same period last year.
The $2.4 million increase was comprised of a $1.7 million increase in
restaurant sales, $302,000 increase in royalty and franchise revenue and a
$411,000 increase in other revenue from the Company's aviation subsidiary.
The increase in restaurant sales was due primarily to new restaurant openings
partially offset by a decrease in same store sales. The Company operated 260
restaurants at July 2, 2000 compared to 244 restaurants at July 4, 1999.
Company-owned same restaurant sales decreased 3.3% compared to the same period
in 1999. The decrease was primarily due to a decrease in transaction counts
offset in part by an increase in average check amounts. Transaction counts per
restaurant day, which represent a count of orders taken rather than actual
customers served, decreased 9.75% to 620 in the three months ended July 2, 2000
compared to 687 in the same period in 1999. The decrease in transaction counts
was attributable to heavy discounting by competitors, which adversely affected
customer traffic in the Company's restaurants, and the continuing impact of
the Company's 8 and 12 hamburger sackful offerings, which serve multiple
customers through a single transaction.
The average customer check for Company-owned restaurants for the three months
ended July 2, 2000 was $4.60 compared to $4.29 for the three months ended
July 4, 1999, an increase of 7.2%. The increase in average customer
check was due primarily to selected product price increases of approximately
5.0% implemented in the first and second quarters of 2000.
The Company's franchisees opened eight franchised restaurants in the three
months ended July 2, 2000 and three in the three months ended July 4, 1999.
The franchise system operated 127 restaurants at July 2, 2000 compared to
113 at July 4, 1999. Franchise fee income was $260,000 in the three months
ended July 2, 2000 and $110,000 in the three months ended July 4, 1999.
Royalty revenue increased 13.84% to $1.3 million in the three months ended
July 2, 2000 from $1.1 million in the three months ended July 4, 1999. This
increase resulted primarily from a 14.9% increase in franchise restaurant
sales.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, was $1.8 million for the three months ended July 2, 2000
compared to $1.4 million for the three months ended July 4, 1999, a 29.3%
increase. This increase in revenue resulted primarily from an increase in
retail jet fuel prices during the three months ended July 2, 2000 compared to
the three months ended July 4, 1999.
Cost of restaurant sales was $55.5 million for the three months ended
July 2, 2000 compared to $52.5 million for the three months ended
July 4, 1999. Food and paper costs as a percent of restaurant sales increased
to 32.77% in the three months ended July 2, 2000 from 30.87% in the three
months ended July 4, 1999. The increase in food and paper costs as a percent
of restaurant sales resulted primarily from commodity price increases for beef
and pork, in addition to an increase in sales of the Company's new Chicken
Wing offering. This new offering has a lower gross margin but, because of its
higher sales price, contributes more profit than many of the Company's other
offerings.
Depreciation and amortization expenses increased $413,000, or 12.7%, to $3.7
million in the three months ended July 2, 2000 versus same period last year.
The increase resulted primarily from capital expenditures related to
refurbishing restaurant buildings, upgrading restaurant equipment and opening
new restaurants.
General and administrative expenses decreased $557,000, or 8.0%, to $6.4
million in the three months ended July 2, 2000 versus same period last year.
The decrease in general and administrative expenses resulted primarily from
tighter expense controls and a decrease in group insurance and pension cost.
Other expenses increased $359,000, or 43.14%, to $1.2 million in the three
months ended July 2, 2000 versus same period last year. This increase resulted
primarily from an increase in the wholesale cost of jet fuel purchased by the
Company's Aviation Subsidiary in the three months ended July 2, 2000 compared
to the same period in 1999.
Interest expense, net of interest income, increased $397,000 to $3.0 million in
the three months ended July 2, 2000 from $2.6 million in the three months
ended July 4, 1999. The increase resulted from an increase in interest
expense related to capitalized leases and higher costs related to corporate debt
maintenance resulting from a increasing rate environment.
The Company's provision for income taxes decreased $498,000, to $175,000 from
$673,000 in the three months ended July 4, 1999. The effective tax rate
exceeded the statutory income tax rate primarily because of the non-deductible
portion of amortization expense associated with acquisition-related goodwill.
Comparison of the Six Months Ended July 2, 2000
-----------------------------------------------
to the Six Months Ended July 4, 1999
------------------------------------
CASH OPERATING PROFIT
---------------------
Cash operating profit (net income before interest, taxes, depreciation and
amortization, and other non-operating gains, losses or expenses) is one of the
key standards used by the Company to measure operating performance. Cash
operating profit is used to supplement operating income as an indicator of
operating performance and cash flows from operating activities as a measure of
liquidity, and not as an alternative to measures defined and required by
generally accepted accounting principles.
Cash operating profit for the six months ended July 2, 2000 decreased $4.9
million to $9.0 million (6.7% of revenues) compared to $13.9 million (10.5% of
revenues) for the six months ended July 4, 1999. The 35.6% decrease in
cash operating profit was primarily attributable to a decrease in restaurant
sales and to a temporary increase in labor in the first quarter and continuing
higher food and paper costs.
RESULTS OF OPERATIONS
---------------------
Total Krystal system (Company and Franchise combined) restaurant sales for the
six months ended July 2, 2000 increased 2.8% to $175.6 million compared to
$170.8 million for the six months ended July 4, 1999.
Total Company revenues increased 0.8% to $134.1 million in the six months
ended July 2, 2000 compared to $133.0 million in the six months ended
July 4, 1999. Of the $1.1 million increase, $390,000 was attributable
to an increase in royalty and franchise revenue and a $634,000 increase in
other revenue from the Company's aviation subsidiary. The Company had 260
restaurants open at July 2, 2000 compared to 244 restaurants open at
July 4, 1999.
Company-owned same restaurant sales for the six months ended July 2, 2000 were
$118.8 million compared to $124.8 million for the six months ended
July 4, 1999, a decrease of 4.85%. The decrease in same restaurant sales
resulted primarily from a decrease in transaction counts offset in part by an
increase in the amount of the average customer check. Transaction counts per
restaurant day, which represent a count of orders taken rather than actual
customers served, decreased 10.2% to 617 in the six months ended July 2, 2000
compared to 687 in the same period of 1999. The decrease in transaction
counts resulted in part from a reduction in customer traffic and in part from
increased sales of the Company's Sackful offerings (sacks of eight and twelve
Krystal hamburgers) which tend to feed multiple customers through a single
transaction. The customer traffic decrease was primarily a reflection of the
high comparable traffic for the same period in 1999 and heavy discounting by
competitors in the second quarter. The high traffic in 1999 was due to
introductions of the Company's Krystal Chik and Sackful menu items which were
accompanied by heavy promotional efforts. During the product introduction
phase for the Krystal Chik and Sackful offerings, same restaurant sales
increased significantly, before stabilizing at slightly lower levels in
subsequent fiscal periods.
The average customer check for Company-owned restaurants for the six months
ended July 2, 2000 was $4.49 compared to $4.23 for the six months ended
July 4, 1999, an increase of 6.2%. The increase in average customer
check was due primarily to increased food volume per transaction resulting from
the Sackful offering and to maintaining product price increases of
approximately 3.8% implemented in the first half of 2000 versus the same period
of 1999. During the six months ended July 2, 2000, sales of Sackfuls
accounted for $18.2 million or 14.2% of restaurant sales compared to
$15.4 million, or 12.0% of restaurant sales, for the six months ended
July 4, 1999.
The Company's franchisees opened ten franchised restaurants in the six
months ended July 2, 2000 and three in the six months ended July 4, 1999.
The franchise system operated 127 restaurants at July 2, 2000 compared to
113 at July 4, 1999. Franchise fee income was $325,000 in the six months
ended July 2, 2000 compared to $110,000 in the six months ended July 4, 1999.
Royalty revenue increased 8.2% to $2.3 million in the six months ended
July 2, 2000 from $2.1 million in the six months ended July 4, 1999. This
increase was primarily due to a 11.0% increase in franchise restaurant sales
and was partially offset by a decrease in royalties from grocery channel sales
of frozen Krystals of $29,900. Royalties from the grocery channel sales of
frozen Krystals were $97,200 in the six months ended July 2, 2000 compared to
$127,100 in the same period of 1999.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, was $3.4 million for the six months ended July 2, 2000
compared to $2.8 million for the six months ended July 4, 1999,
a 23.0% increase. This increase in revenue resulted primarily from an
increase in retail jet fuel prices during the six months ended
July 2, 2000 compared to the six months ended July 4, 1999.
Cost of restaurant sales was $109.9 million for the six months ended
July 2, 2000 compared to $104.1 million for the six months ended
July 4, 1999. The increase in cost of restaurant sales resulted
primarily from an increase in the cost of food sold and increased labor
costs. Food and paper costs as a percent of restaurant sales increased to
32.46% in the six months ended July 2, 2000 from 30.74% in the six months
ended July 4, 1999. The increase in food and paper costs as a percent of
restaurant sales resulted in part from increases in the price of beef, pork and
to a lesser extent, increases in the prices for bread products. Direct labor
costs as a percent of restaurant sales increased to 24.56% in the six months
ended July 2, 2000 from 23.11% in the six months ended July 4, 1999. The
increase in direct labor costs as a percentage of restaurant sales resulted
from an increase in the average pay rate of the Company's hourly restaurant
employees in the first quarter and reduced labor efficiency caused by lower
same store sales. Temporary labor inefficiencies were compounded by
incremental labor incurred during the first quarter in conjunction with field
level training related to the Company's new Restaurant Information System.
Other labor costs as a percent of restaurant sales increased to 8.03% in the
six months ended July 2, 2000 from 7.75% in the six months ended July 4, 1999.
The increase in other labor costs as a percent of restaurant sales resulted
from higher labor rates.
Depreciation and amortization expenses increased $895,000, or 13.9%, to $7.3
million in the six months ended July 2, 2000 compared to $6.4 million in the
six months ended July 4, 1999. The increase resulted primarily from capital
expenditures related to refurbishing restaurant buildings, upgrading restaurant
equipment and opening new restaurants.
General and administrative expenses decreased $340,000, or 2.6%, to $13.0
million in the six months ended July 2, 2000 compared to $13.4 million in
the six months ended July 4, 1999. The decrease in general and
administrative expenses resulted primarily from management's more efficient
utilization of personnel and systems.
Other expenses increased $648,000, or 39.85%, to $2.3 million in the six
months ended July 2, 2000 compared to $1.6 million in the six months ended
July 4, 1999. These expenses are costs incurred in operating the Aviation
subsidiary. This increase resulted primarily from an increase in jet fuel
costs in the six months ended July 2, 2000 compared to the same period in
1999.
Interest expense, net of interest income, increased $783,000 to $5.9 million in
the six months ended July 2, 2000 from $5.1 million in the six months
ended July 4, 1999. The increase resulted from an increase in interest
expense related to capitalized leases and higher costs related to corporate debt
maintenance.
The Company's provision for income taxes decreased $2.5 million, to a tax
benefit of $1.2 million in the six months ended July 2, 2000 as compared
to a tax provision of $1.3 million for the six months ended July 4, 1999. The
effective income tax rate was 28.7% for the six months ended July 2, 2000 as
compared to 57.5% for the six months ended July 4, 1999. The effective tax
rate in the prior year exceeded the statutory income tax rate primarily because
of the non-deductible portion of amortization expense associated with
acquisition-related goodwill.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company does not maintain significant inventory or accounts receivables
since substantially all of its restaurants' sales are for cash. However, the
Company closely monitors receivables from franchisees. The Company typically
receives several weeks of trade credit in purchasing food and supplies which is
standard in the restaurant business. The Company normally operates with
working capital deficits (current liabilities exceeding current assets) and had
a working capital deficit of $21.1 million at July 2, 2000, compared to a
working capital deficit of $24.4 million at January 2, 2000.
Capital expenditures totaled approximately $21.3 million in the six months
ended July 2, 2000 as compared to $8.5 million in the six months ended
July 4, 1999. Included in the capital expenditures for the six months
ended July 2, 2000 is approximately $5.1 million related to properties the
Company expects to sell through sales and leaseback transactions within the
next six months. The Company opened twelve new restaurants during the six
months ended July 2, 2000 and opened four during the six months ended
July 4, 1999. Management estimates that capital expenditures will be
approximately $4.2 million during the remainder of 2000. Capital
expenditures for the remainder of the current year are expected to include the
the acquisition of land for restaurants to open in 2001, the refurbishment of
certain restaurants, ongoing capital improvements, the conversion of restaurant
computer systems and the construction of a new, pre-leased hangar at the
Aviation subsidiary.
In December, 1998, the Company obtained a sales and leaseback commitment with
a firm for up to $6.0 million of properties which were to be developed and
operated as Company-owned Krystal restaurants. In September, 1999, this
commitment was increased to $9.0 million. As of July 2, 2000, seven
restaurants have been developed using $6.2 million of this commitment. The
remaining balance on this commitment has expired and will not be used. In
August 2000, the Company obtained a new $14 million sale and leaseback
commitment from the same firm. The new commitment expires in August 2000.
The primary term of leases under this arrangement is 18 years, with two
successive five year renewal options.
At July 2, 2000, the Company had available cash of approximately $5.3
million, receivables of $1.2 million, and $5.6 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.
Item 4. Submission of Matters to a Vote of Security Holders
By written consent of its sole shareholders, Port Royal Holdings, Inc., dated
April 12, 2000, the following persons were elected to the Board of Directors of
the Company: Philip H. Sanford, James F. Exum, Jr., W. A. Bryan Patten, Richard
C. Patton, Benjamin R. Probasco, A. Alexander Taylor II and Andrew G. Cope.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On September 21, 1999, the Company was named as a defendant in a lawsuit filed
in the Northern District of Alabama (Michael Jones vs. The Krystal Company)
alleging that the plaintiff was denied access to the restrooms in one of the
Company's restaurants in violation of the Americans with Disabilities Act.
The lawsuit seeks class action status on behalf of all wheelchair bound patrons
of the Company's restaurants who have been denied access to restrooms. The
Company and plaintiff's counsel have tentatively agreed to a settlement of this
lawsuit. The Company's legal counsel and plaintiff's counsel are in the
process of negotiating the proposed settlement agreement, which must also be
submitted to the federal district court for approval. Under the terms of the
proposed settlement the Company will commit to renovate the restrooms in its
restaurants that are not handicap accessible in exchange for the dismissal of
the lawsuit.
The Company is party to various other legal proceedings incidental to its
business. The ultimate disposition of these matters is not presently
determinable but will not, in the opinion of management, have a material
adverse effect on the Company's financial condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits-
Exhibit-27 Financial Data Schedule is filed with this 10-Q.
(b) Reports on Form 8-K-
No Form 8-K was filed by the Registrant during the second quarter
of 2000.
