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 September 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-20040
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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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As of November 7, 1996, 7,491,768 shares of the Registrant's Common
Stock were issued and outstanding.
THE KRYSTAL COMPANY
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SEPTEMBER 29, 1996
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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 September 29, 1996
and December 31, 1995, (2) the results of their operations, their
changes in common shareholders' equity and their cash flows for the
nine months ended September 29, 1996 and October 1, 1995, and (3)
the results of their operations for the three months ended
September 29, 1996 and October 1, 1995 have been included. The results
of operations for the interim period ended September 29, 1996 are not
necessarily indicative of the results for the full year.
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)
September 29, December 31,
1996 1995
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(Unaudited) (Audited)
ASSETS
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CURRENT ASSETS:
Cash and temporary investments $ 24,444 $ 13,713
Receivables 1,783 1,752
Income tax receivable 1,203 609
Net investment in direct financing
leases-current portion 676 856
Inventories 2,028 2,322
Deferred tax asset 5,553 5,553
Prepayments and other 1,082 830
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Total current assets 36,769 25,635
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NET INVESTMENT IN DIRECT FINANCING
LEASES, excluding current portion 404 867
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PROPERTY, BUILDINGS, AND EQUIPMENT, net 92,793 98,546
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LEASED PROPERTIES, net 1,704 1,863
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OTHER ASSETS:
Cash surrender value of life insurance 5,440 5,117
Other 776 667
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Total other assets 6,216 5,784
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TOTAL ASSETS $137,886 $132,695
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<FN>
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)
September 29, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
- ----------------------------------- ------- ---------
(Unaudited) (Audited)
CURRENT LIABILITIES:
Accounts payable $ 3,785 $ 1,681
Accrued liabilities 15,662 9,427
Current portion of long-term debt 858 432
Current portion of capital
lease obligations 530 653
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Total current liabilities 20,835 12,193
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LIABILITIES SUBJECT TO COMPROMISE 53,875 56,909
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LONG-TERM DEBT, excluding current portion 3,154 3,621
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CAPITAL LEASE OBLIGATIONS, excluding
current portion 2,365 2,754
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DEFERRED INCOME TAXES 2,719 2,719
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OTHER LONG-TERM LIABILITIES 8,350 7,852
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SHAREHOLDERS' EQUITY:
Preferred stock, without par value;
5,000,000 shares authorized:
no shares issued and outstanding - -
Common stock, without par value;
15,000,000 shares authorized;
issued and outstanding, 7,491,768 shares
at September 29, 1996, and 7,526,808
shares at December 31, 1995 40,556 40,830
Retained earnings 7,864 8,195
Deferred compensation (1,832) (2,378)
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Total shareholders' equity 46,588 46,647
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TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $137,886 $132,695
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<FN>
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, except per share data)(Unaudited)
For The Three For The Nine
Months Ended, Months Ended,
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Sept. 29, Oct. 1, Sept. 29, Oct. 1,
1996 1995 1996 1995
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REVENUES:
Restaurant sales $ 60,658 $ 60,278 $175,401 $177,587
Franchise fees 49 276 171 504
Royalties 713 629 2,021 1,718
Other revenues 1,012 1,325 3,409 4,396
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62,432 62,508 181,002 184,205
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COST AND OTHER EXPENSES:
Cost of restaurant sales 50,607 49,874 145,847 146,484
Depreciation and amortization
expenses 2,845 3,206 8,447 9,277
General and administrative
expenses 6,578 6,757 19,567 19,234
Other expenses, net 791 1,036 2,742 3,401
Special charge - 10,000 - 10,000
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60,821 70,873 176,603 188,396
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OPERATING INCOME (LOSS) 1,611 ( 8,365) 4,399 ( 4,191)
REORGANIZATION ITEM:
Professional fees and
other expenses ( 776) - ( 2,288) -
INTEREST EXPENSE ( 989) ( 1,014) ( 3,002) ( 3,130)
INTEREST INCOME 135 135 361 565
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LOSS BEFORE BENEFIT FROM
INCOME TAXES ( 19) ( 9,244) ( 530) ( 6,756)
BENEFIT FROM INCOME TAXES ( 8) ( 3,513) ( 199) ( 2,567)
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NET LOSS $( 11) $( 5,731) $( 331) $( 4,189)
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LOSS PER COMMON SHARE $ 0.00 $( 0.76) $( 0.04) $( 0.56)
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 7,492 7,510 7,502 7,510
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<FN>
See accompanying notes to consolidated condensed financial statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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FOR THE NINE MONTHS ENDED
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SEPTEMBER 29, 1996 AND OCTOBER 1, 1995
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(In thousands)
(Unaudited)
Common Retained Deferred
Stock Earnings Compensation
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BALANCE, December 31, 1995 $40,830 $ 8,195 $(2,378)
Net loss - ( 331) -
Forfeiture of 36,000 restricted
shares ( 278) - 278
Issuance of 960 common shares to
management and non-employee
director under restricted stock
plan 4 - ( 4)
Amortization of deferred
compensation - - 272
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BALANCE, September 29, 1996 $40,556 $ 7,864 $(1,832)
====== ====== ======
BALANCE, January 1, 1995 $40,909 $13,438 $(2,711)
Net loss - (4,189) -
Issuance of 73,440 common shares
to management and non-employee
directors under restricted
stock plan 569 - ( 569)
Tax benefit of restricted
stock vested - 81 -
Forfeiture of 40,000 restricted
shares ( 213) - 213
Amortization of deferred
compensation - - 320
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BALANCE, October 1, 1995 $41,265 $ 9,330 $(2,747)
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<FN>
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 Nine Months Ended,
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Sept. 29, Oct. 1,
1996 1995
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OPERATING ACTIVITIES:
Net loss $ ( 331) $(4,189)
Adjustments to reconcile net loss to net
cash provided by operating activities-
Depreciation and amortization 8,447 9,277
(Increase)decrease in receivables ( 31) 221
(Increase) in income tax receivable ( 594) ( 701)
Decrease in inventories 294 48
(Increase) in deferred tax asset - (3,800)
(Increase) in prepayments and other ( 252) ( 407)
Increase (decrease)in accounts payable 2,104 (1,586)
(Decrease) in income taxes payable - ( 318)
Increase in accrued liabilities 6,235 9,316
Other ( 131) 440
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Net cash provided by operating activities
before reorganization activities 15,741 8,301
Changes in liabilities from reorganization
activities:
(Decrease) in accounts payable ( 11) -
(Decrease) in accrued liabilities (3,023) -
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Net cash provided by operating activities 12,707 8,301
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INVESTING ACTIVITIES:
Additions to property, buildings,
and equipment (4,149) (13,825)
Proceeds from sale of property,
buildings, and equipment 2,083 500
Payments received on net investment in
direct financing leases 643 565
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Net cash used in investing activities (1,423) (12,760)
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FINANCING ACTIVITIES:
Repayments of long-term debt ( 41) ( 3,372)
Principal payments of capital
lease obligations ( 512) ( 482)
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Net cash used in financing activities ( 553) ( 3,854)
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NET INCREASE(DECREASE) IN CASH AND
TEMPORARY INVESTMENTS 10,731 ( 8,313)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 13,713 14,804
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CASH AND TEMPORARY INVESTMENTS,
end of period $24,444 $ 6,491
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 513 $ 3,379
Income taxes 637 2,175
Reorganization item: professional fees
and other expenses 618 -
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<FN>
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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In July 1994, Krystal was named a defendant in a suit filed in the
United States District Court for the Middle District of Tennessee, in
which 41 plaintiffs who were current and former employees of Krystal,
alleged violations of the Fair Labor Standards Act of 1938 ("FLSA") and
sought back wages, liquidated damages, costs and attorney's fees. The
suit alleged that the plaintiffs were uncompensated for time which they
worked on Krystal's behalf. In February 1995, ten additional
plaintiffs, also current and former employees of Krystal, filed a
separate suit in the same court containing essentially the same
allegations. As a result, Krystal established a reserve of $2,000,000
to cover the claims of the plaintiffs in the two suits, the costs
associated therewith, and the claims of any other employees and the
costs associated therewith. Since the February 1995 action was
originally filed, approximately 300 additional plaintiffs joined that
suit.
On April 18, 1995, Krystal settled the July 1994 case by agreeing to pay
$840,000 to the plaintiffs and their counsel. By order dated
August 28, 1995, the Court in the February 1995 case provisionally
granted the plaintiffs' motion for court-supervised notice of the
pendency of that action to prospective class members from among current
and former employees of Krystal for the past three years.
In the third quarter of 1995, a total of 17 additional current and
former employees of Krystal filed three additional suits in the United
States District Courts for the Northern District of Georgia, the
Northern District of Alabama and the Middle District of Florida,
containing essentially the same allegations as set forth in the July
1994 and February 1995 suits.
In light of the three new suits filed against Krystal during the third
quarter of 1995 and the order entered in the February 1995 suit
provisionally granting the plaintiffs' motion for court-supervised
notice of the pendency of that action, Krystal established an additional
$10,000,000 reserve to cover an estimate of the exposure resulting from
(i) the claims of the plaintiffs in the four pending suits, (ii) the
potential for additional claims of other current and former employees,
(iii) related claims, and (iv) the costs associated therewith, the
balance of which is $9,822,000 at September 29, 1996.
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 FLSA.
The four pending lawsuits filed against Krystal under the FLSA have been
stayed by the bankruptcy filing. Krystal is a debtor-in-possession for
purposes of the bankruptcy case. Approximately 8,000 current or former
employees filed claims by the June 6, 1996 bar date alleging that they
worked time for which they were not compensated. The Company has the
exclusive right until November 15, 1996 to file a Chapter 11 Plan.
Prior to that time, the Company is committed to make proposals for the
resolution of valid FLSA claims. A proposal to resolve approximately
5,000 claims of crew members for a aggregate payment of approximately
$1.6 million was made during the third quarter; counsel for the majority
of these claimants has not communicated this proposal to its clients.
The Company expects to contest any FLSA claims which it believes to be
invalid.
The accrual for employee claims of $9,822,000 at September 29, 1996 is
based on estimates made by management taking into consideration all
presently available facts and circumstances regarding the bankruptcy
proceedings and FLSA matters discussed above. However, due to the
uncertainty surrounding the ultimate amount of employee claims,
additional reserves may be required.
The Company is party to other 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 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Comparison of the Three Months Ended September 29, 1996
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to the Three Months Ended October 1, 1995
-----------------------------------------
Total revenues decreased 0.1% to $62.4 million for the third quarter of
1996 compared to $62.5 million for the same period of 1995. Restaurant
sales increased $380,000. Company-owned average same restaurant sales
for the third quarter of 1996 were $242,000 compared to $238,000 for the
same period in 1995, an increase of 1.7%. The Company's management
believes introduction of limited time offering products contributed to
the third period improvement of sales. The fast food industry continues
to experience soft sales resulting in widespread heavy sales discounting
and new product introductions. The Company is uncertain as to how long
the sales softness and resulting discounting will continue, but the
Company will continue to be adversely affected as long as this
industry condition persists. The Company had 250 restaurants open at
the end of the third quarter of 1996 compared to 255 at the end of the
third quarter of 1995.
Franchise fees and royalties decreased $143,000 to $762,000 in the third
quarter of 1996 versus the same period in 1995. The franchise system
had 83 restaurants open at the end of the third quarter of 1996
compared to 78 open at the end of the third quarter of 1995. The
decrease is due to franchise fee income recognized on only one franchise
restaurant opening in the third quarter of 1996, versus income
recognized on 10 openings in the same period of 1995.
Other revenue, which comes from the Company's aviation subsidiary, was
$1.0 million in the third quarter of 1996 compared to $1.3 million in
the third quarter of 1995. This decline was a result of discontinued
outside parts sales and closing the maintenance shop in the third
quarter of 1996.
The average customer check for Company-owned full size restaurants in
the third quarter of 1996 was $3.65 as compared to $3.48 in the same
period of 1995, an increase of 4.9%. The average customer check for
Company-owned double drive-thru restaurants in the third quarter of
1996 was $3.94 as compared to $3.85 in the same period of 1995, an
increase of 2.3%. The changes in average customer check are due to
product prices increasing approximately 1.7% in the third quarter of
1996 over the same period in 1995, and the introduction of promotional
products and menu combinations which increased the average customer
check. Customer counts per restaurant day decreased to 721 in the third
quarter of 1996 compared to 738 in the same period of 1995, a decrease
of 2.3%.
Cost of restaurant sales increased $733,000, approximately 1.5%, to
$50.6 million in the third quarter of 1996, from $49.9 million in the
same period of 1995. Cost of restaurant sales as a percentage of
restaurant sales increased to 83.4% in the third quarter of 1996 from
82.7% in the same period of 1995. These increases are primarily the
result of increases in food and paper costs and labor expenses that the
Company was unable to pass through to customers. Total food and paper
costs were $20.1 million in the third quarter of 1996 as compared to
$18.9 million in the third quarter of 1995. Food and paper costs as a
percentage of restaurant sales increased to 33.1% in the third quarter
of 1996 compared to 31.4% in the same period of 1995. Direct labor
cost decreased $414,000 in the third quarter of 1996, approximately
3.0%, to 21.9% of restaurant sales in the third quarter of 1996, versus
22.7% in the third quarter of 1995. Assistant restaurant manager labor
cost increased $217,000, approximately 9.0%. Assistant restaurant
manager labor cost as a percentage of restaurant sales increased to 4.3%
in the third quarter of 1996 from 4.0% in the same period of 1995. As a
plan to increase restaurant performance, the number of assistant
managers has been increased to improve training and supervision with an
offsetting decrease in direct labor. Restaurant manager labor cost
increased $32,000, approximately 1.8%, due to average salary increases
for the third quarter of 1996.
Depreciation and amortization expenses decreased $361,000, approximately
11.3%, to $2.8 million in the third quarter of 1996 as compared to $3.2
million for the same period in 1995. This decrease in the third
quarter of 1996 is due to some assets being fully depreciated in late
1995 and during 1996.
General and administrative expenses decreased $179,000, approximately
2.6%, to $6.6 million in the third quarter of 1996 as compared to $6.8
million for the same period in 1995. Advertising expense was
approximately $2.6 million in the third quarters of 1996 and 1995.
Advertising expense as a percentage of restaurant sales was 4.3% in the
third quarter of 1996 compared to 4.2% in the same period of 1995.
Salaries were approximately $1.9 million in the third quarters of 1996
and 1995.
A special charge of $10.0 million was recorded in the third quarter of
1995 in connection with the compensation of hourly employees as
discussed in the Notes to Consolidated Condensed Financial Statements.
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 is
expensing Reorganization Items as incurred. The total of such
professional fees and expenses during the third quarter of 1996 was
$776,000.
Benefit from income taxes decreased to $8,000 in the third quarter
of 1996 from $3.5 million in the same period of 1995. The effective tax
rate of 38.0% is the approximate combined statutory federal and state
income tax rates.
Comparison of the Nine Months Ended September 29, 1996
------------------------------------------------------
to the Nine Months Ended October 1, 1995
----------------------------------------
Total revenues decreased 1.7% to $181.0 million for the first nine
months of 1996 compared to $184.2 million for the same period of 1995.
Restaurant sales accounted for $2.2 million of this $3.2 million
decrease. Company-owned average same restaurant sales for the first
nine months of 1996 were $699,000 compared to $703,000 for the same
period in 1995, a decrease of 0.6%. The Company's management believes
1996 first nine months results reflect a continuing softness in the fast
food industry resulting in widespread heavy sales discounting throughout
the industry in addition to more inclement weather in the first quarter
of 1996 compared to the same period in 1995. The Company is uncertain
as to how long the sales softness and resulting discounting will
continue, but the Company expects its revenues and same restaurant sales
will continue to be adversely affected as long as this industry
condition persists. The Company had 250 restaurants open at the end of
the first nine months of 1996 compared to 255 at the end of the same
period in 1995.
Franchise fees and royalties were approximately $2.2 million in the
first nine months of 1996 and 1995. The franchise system had 83
restaurants open at the end of the first nine months of 1996 compared to
78 open at the end of the same period in 1995.
Other revenue, which comes from the Company's aviation subsidiary, was
$3.4 million in the first nine months of 1996 compared to $4.4 million
in the same period of 1995. This decline was a result of discontinued
outside parts sales and the closing of a maintenance shop.
The average customer check for Company-owned full size restaurants in
the first nine months of 1996 was $3.54 as compared to $3.43 in the same
period of 1995, an increase of 3.2%. The average customer check for
Company-owned double drive-thru restaurants in the first nine months of
1996 was $3.85 as compared to $3.78 in the same period of 1995, an
increase of 1.9%. The changes in average customer check are due to
product prices increasing approximately 1.8% in the first nine months of
1996 over the same period in 1995, and introducing promotional products
and menu combinations which increased the average customer check.
Customer counts per restaurant day decreased to 709 in the first nine
months of 1996 compared to 738 in the same period of 1995, a decrease
of 3.9%.
Cost of restaurant sales decreased $637,000, approximately 0.4%, to
$145.8 million in the first nine months of 1996, from $146.5 million in
the same period of 1995. Cost of restaurant sales as a percentage of
restaurant sales increased to 83.2% in the first nine months of 1996
from 82.5% in the same period of 1995. These increases are primarily
the result of increases in food and paper costs and labor expenses that
the Company was unable to pass through to customers. Total food and
paper costs were $56.2 million in the first nine months of 1996 as
compared to $55.4 million in the same period in 1995. Food and paper
costs as a percentage of restaurant sales increased to 32.0% in the
first nine months of 1996 as compared to 31.2% in the same period of
1995. Direct labor cost decreased $839,000 in the first nine months of
1996, approximately 2.1%, to 22.4% of restaurant sales in the first nine
months of 1996, versus 22.6% in the same period of 1995. Assistant
restaurant manager labor cost increased $450,000, approximately 6.1%.
Assistant restaurant manager labor cost as a percentage of restaurant
sales increased to 4.5% in the first nine months of 1996 from 4.2% in
the same period of 1995. As a plan to increase restaurant performance,
the number of assistant managers has been increased to improve training
and supervision with an offsetting decrease in direct labor. Restaurant
manager labor cost increased $100,000, approximately 1.8%, due to
average salary increases for the first nine months of 1996.
Depreciation and amortization expenses decreased $830,000, approximately
8.9%, to $8.4 million in the first nine months of 1996 as compared to
$9.3 million for the same period in 1995. This decrease in the first
nine months of 1996 is due to some assets being fully depreciated in
late 1995 and in 1996.
General and administrative expenses increased by $333,000, approximately
1.7%, to $19.6 million in the first nine months of 1996 versus $19.2
million in the same period of 1995. Advertising expense was
approximately $7.6 million in the first nine months of 1996 and 1995.
Advertising expense as a percentage of restaurant sales was 4.4% in the
first nine months of 1996 compared to 4.3% in the same period of 1995.
Salaries increased $323,000 approximately 6.0%, to $5.7 million in the
first nine months of 1996 from $5.4 million in the same period
of 1995. This increase in salaries was primarily the result of normal
cost of living increases given to staff employees and the addition of
key management personnel during 1995.
A special charge of $10.0 million was recorded in the third quarter of
1995 in connection with the compensation of hourly employees as
discussed in the Notes to Consolidated Condensed Financial Statements.
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 is
expensing Reorganization Items as incurred. The total of such
professional fees and expenses during the first nine months of 1996 was
$2.3 million.
Benefit from income taxes decreased to $199,000 in the first nine months
of 1996 from $2.6 million in the same period of 1995. The effective tax
rate of 38.0% is the approximate combined statutory federal and state
income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The filing of the voluntary petition for reorganization under Chapter 11
of the Federal Bankruptcy Code on December 15, 1995 had a significant
impact on the Company's liquidity. The filing stayed payment of
pre-petition outstanding obligations as of December 15, 1995, resulting
in a one-time cash benefit of approximately $7.0 million to the Company.
The Bankruptcy Court approved the payment of pre-petition sales taxes
and real and personal property taxes on owned property totaling
approximately $2.8 million, which was paid during the first nine months
of 1996. Principal payment on senior notes in the amount of $3.0
million due May 31, 1996, is stayed by the Chapter 11 filing, thus
providing an additional temporary cash benefit to the Company. While
the Company is in Chapter 11, it is prohibited from paying interest or
principal on pre-petition obligations without the approval of the
Bankruptcy Court. To the extent cash generated from operations exceeds
capital expenditures, working capital requirements, payments approved by
the Bankruptcy Court and administrative expenses of the reorganization,
the Company will continue to accumulate cash.
Under court order, the Company has the exclusive right to file a
proposed plan of reorganization until November 15, 1996. The Company
intends to fairly and finally settle the FLSA claims and fully discharge
its pre-petition obligations.
The Company does not maintain significant inventory or accounts
receivable since substantially all of its restaurants' sales are for
cash. The Company's receivables from franchisees are closely monitored
and collected weekly. Approximately $26.4 million of liabilities
classified as Liabilities Subject to Compromise after the Chapter 11
filing would otherwise be classified as Current Liabilities at
September 29, 1996. The Company normally operates with working capital
deficits (current liabilities exceeding current assets); however, as a
result of the reclassification of pre-petition Current Liabilities to
Liabilities Subject to Compromise, the Company had a working capital
surplus of $15.9 million at September 29, 1996 compared to a working
capital deficit of $12.2 million at October 1, 1995.
Capital expenditures totaled approximately $4.1 million in the first
nine months of 1996 compared to $13.8 million for the same period in
1995. The Company opened no new restaurants during the first nine
months of 1996 compared to six new restaurants opened during the same
period of 1995. Approximately $2.7 million is budgeted for capital
expenditures in the fourth quarter of 1996 for refurbishing of certain
restaurants and ongoing capital improvements. The Company owns
approximately 54.0% of its restaurant sites and leases the remainder.
Management believes that existing cash and cash flow from operations
will be sufficient to meet its anticipated capital expenditures and
other obligations for the remainder of 1996, subject however to the
terms of any Chapter 11 plan which may be approved in 1996.
PART II OTHER INFORMATION
Item l. Legal proceedings
On December 15, 1995, the Company 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). The Company is debtor-in-possession
for purposes of the bankruptcy case. Approximately 8,000 current and
former employees filed claims by the June 6, 1996 bar date alleging that
they worked time for which they were not compensated. The Company
expects to contest any claims which it believes to be invalid. The
Company has the exclusive right until November 15, 1996 to file a
Chapter 11 Plan. Four pending lawsuits filed against the Company under
the FLSA have been stayed by the bankruptcy filing.
The terms and provisions of any reorganization plan and the timing
of the final confirmation of such a plan are unknown at this time. The
Company intends to fairly and finally settle the FLSA claims and fully
discharge its pre-petition obligations.
The Company is party to other various legal proceedings incidental
to its business. The ultimate disposition of these matters is not
presently determinable but will not, in the opinion of management, have
a material adverse effect on the Company's financial condition or
results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits-
Exhibit-27 Financial Data Schedule is filed with this 10-Q.
Computation of per share earnings is shown on the Registrant's
Consolidated Statements of Operations.
(b) Reports on Form 8-K-
No form 8-K was filed during the third quarter of 1996 by the
Registrant.
THE KRYSTAL COMPANY AND SUBSIDIARY
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
THE KRYSTAL COMPANY
(Registrant)
Dated: 11/7/96 Camden B Scearce
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Camden B. Scearce
(Vice President and Chief Financial
and Accounting Officer)