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 March 30, 1997
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 May 7, 1997, 7,478,568 shares of the Registrant's Common Stock were
issued and outstanding.
THE KRYSTAL COMPANY
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March 30, 1997
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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 March 30, 1997
and December 29, 1996, and (2) the results of their operations, their
changes in common shareholders' equity and their cash flows for the
three months ended March 30, 1997 and March 31, 1996, have been included.
The results of operations for the interim period ended March 30, 1997 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)
<CAPTION
March 30, December 29,
1997 1996
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(Unaudited) (Audited)
ASSETS
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CURRENT ASSETS:
Cash and temporary investments $ 32,952 $ 28,765
Receivables, net 1,712 2,566
Income tax receivable 306 -
Net investment in direct financing
leases-current portion 451 562
Inventories 1,822 2,156
Deferred tax asset 8,327 8,327
Prepayments and other 577 1,980
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Total current assets 46,147 44,356
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NET INVESTMENT IN DIRECT FINANCING
LEASES, excluding current portion 227 305
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PROPERTY, BUILDINGS, AND EQUIPMENT, net 90,204 91,173
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LEASED PROPERTIES, net 1,601 1,653
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OTHER ASSETS:
Cash surrender value of life insurance 5,746 5,638
Other 786 745
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Total other assets 6,532 6,383
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TOTAL ASSETS $144,711 $143,870
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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)
---------------------------------------
(In thousands)
March 30, December 29,
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY ------- ---------
- ------------------------------------ (Unaudited) (Audited)
CURRENT LIABILITIES:
Accounts payable $ 3,756 $ 4,535
Accrued liabilities 20,844 17,986
Current portion of liabilities subject
to compromise 23,817 -
Current portion of long-term debt 58 967
Current portion of capital
lease obligations 376 454
Income taxes payable - 822
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Total current liabilities 48,851 24,764
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LIABILITIES SUBJECT TO COMPROMISE,
excluding current portion 34,500 58,317
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LONG-TERM DEBT, excluding current portion 3,654 3,090
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CAPITAL LEASE OBLIGATIONS, excluding
current portion 2,203 2,278
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DEFERRED INCOME TAXES 2,287 2,286
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OTHER LONG-TERM LIABILITIES 8,743 8,447
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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, 7,478,568 shares
at March 30, 1997, and 7,491,768 shares
at December 29, 1996 40,398 40,556
Retained earnings 5,610 5,873
Deferred compensation (1,535) (1,741)
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Total shareholders' equity 44,473 44,688
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TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $144,711 $143,870
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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 Months Ended
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March 30, March 31,
1997 1996
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REVENUES:
Restaurant sales $ 57,264 $ 55,876
Franchise fees 41 33
Royalties 707 618
Other revenues 1,151 1,140
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59,163 57,667
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COST AND EXPENSES:
Cost of restaurant sales 47,483 46,769
Depreciation and amortization expense 2,622 2,802
General and administrative expenses 6,717 6,440
Other expenses, net 831 963
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57,653 56,974
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OPERATING INCOME 1,510 693
REORGANIZATION ITEM:
Professional fees and other expenses ( 719) ( 967)
INTEREST EXPENSE:
Contractual rate interest ( 986) ( 1,009)
Interest related to certain
pre-petition liabilities, net ( 182) ( 168)
INTEREST INCOME 307 250
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LOSS BEFORE BENEFIT FROM INCOME
TAXES AND EXTRAORDINARY ITEM ( 70) ( 1,201)
BENEFIT FROM INCOME TAXES ( 27) ( 455)
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LOSS BEFORE EXTRAORDINARY ITEM ( 43) ( 746)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of applicable income tax benefit
of $134,000 in 1997 ( 220) -
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NET LOSS $( 263) $( 746)
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LOSS PER COMMON SHARE:
Before loss on early extinguishment of debt $( 0.01) $( 0.10)
Loss on early extinguishment of debt ( 0.03) -
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Loss per common share $( 0.04) $( 0.10)
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WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 7,484 7,522
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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 THREE MONTHS ENDED
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MARCH 30, 1997 AND MARCH 31, 1996
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(In thousands)
(Unaudited)
Common Retained Deferred
Stock Earnings Compensation
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BALANCE, December 29, 1996 $40,556 $ 5,873 $(1,741)
Net loss - ( 263) -
Forfeiture of 13,200 restricted
shares ( 158) - 158
Amortization of deferred
compensation - - 48
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BALANCE, March 30, 1997 $40,398 $ 5,610 $(1,535)
====== ====== ======
BALANCE, December 31, 1995 $40,830 $ 8,195 $(2,378)
Net loss - ( 746) -
Forfeiture of 12,000 restricted
shares ( 92) 92
Amortization of deferred
compensation - - 91
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BALANCE, March 31, 1996 $40,738 $ 7,449 $(2,195)
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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 Three Months Ended,
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March 30, March 31,
1997 1996
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OPERATING ACTIVITIES:
Net loss $( 263) $( 746)
Adjustments to reconcile net loss
to net cash provided by operating
activities-
Depreciation and amortization 2,622 2,802
Increase in deferred taxes 1 -
Loss on early extinguishment of debt 354 -
Decrease in receivables 854 196
(Increase) in income tax receivable ( 306) ( 497)
Decrease in inventories 334 399
Decrease in prepayments and other 1,403 223
Increase (decrease)in accounts payable ( 779) 1,788
(Decrease) in income taxes payable ( 822) -
Increase in accrued liabilities 2,858 1,998
Other ( 255) 40
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Net cash provided by operating activities
before reorganization activities 6,001 6,203
Changes in liabilities from reorganization
activities:
(Decrease) in accounts payable - ( 60)
(Decrease) in accrued liabilities - (2,530)
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Net cash provided by operating activities 6,001 3,613
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INVESTING ACTIVITIES:
Additions to property, buildings,
and equipment (1,837) ( 548)
Proceeds from sale of property,
buildings, and equipment 332 214
Payments received on net investment in
direct financing leases 189 207
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Net cash used in investing activities (1,316) ( 127)
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FINANCING ACTIVITIES:
Repayments of long-term debt ( 345) ( 17)
Principal payments of capital
lease obligations ( 153) ( 169)
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Net cash used in financing activities ( 498) ( 186)
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NET INCREASE(DECREASE) IN CASH AND
TEMPORARY INVESTMENTS 4,187 3,300
CASH AND TEMPORARY INVESTMENTS,
beginning of period 28,765 13,713
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CASH AND TEMPORARY INVESTMENTS,
end of period $32,952 $17,013
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 146 $ 176
Income taxes 999 38
Reorganization item: professional fees
and other expenses 729 196
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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
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.
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 were
stayed by the bankruptcy filing.
Krystal's wholly-owned subsidiary, Aviation, did not file a petition for
relief under Chapter 11 with the Court. Separate condensed financial
statements of Krystal have not been presented as the operations of Krystal
represent substantially all of the operations of the Company.
At December 29, 1996, the Company established an additional $4,000,000 reserve
related to the FLSA claims. Subsequent to December 29, 1996, Krystal and the
majority of the FLSA plaintiffs reached a settlement providing for the payment
of approximately $13,000,000 for the FLSA claims and related legal costs.
A plan of reorganization, as amended (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
effective. The confirmed plan provided for the following:
Refinancing - The Company has arranged term loans of (A) $10.0 million
and (B) $20.0 million and a revolving loan of $23.0 million effective
April 23, 1997, and maturing April 23, 2002. The term loans are payable in
quarterly installments beginning August 1, 1997 and beginning May 1, 1999
respectively. The credit available under the revolving loan is reduced to
$20.0 million June 29, 1998, otherwise funds may be borrowed and repaid any
time until the April 23, 2002, maturity date. Interest on the loans is at a
specified margin over base rates of certain money center banks or over the
Eurodollar rate. The Company's interest in all of its real and personal
properties including leasehold interests, life insurance policies, accounts
receivable and excess cash is pledged as collateral for the new debt.
Senior Debt and Secured Debt - Senior debt and secured debt totaling
approximately $38.6 million along with all past due interest and additional
interest at 1.3% per annum were paid on April 23, 1997.
FLSA Claims - FLSA claims represented by class action suits and totaling
about $12.6 million were paid April 23, 1997. Pro se claims were settled for
approximately $100,000 and were paid on May 2, 1997.
Trade Claims - The holders of approximately $7.0 million of trade claims
were paid 100% of their claims on April 23, 1997 with interest at 8.5% per
annum for the period December 15, 1995 - April 23, 1997.
Since all non-contested claims have been paid or will be paid in full with
interest, the reorganization value of all assets and liabilities is book
value at April 23, 1997.
Item 2. Management's Discussion and Analysis of Financial
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Condition and Results of Operations
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Comparison of the Three Months Ended March 30, 1997
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to the Three Months Ended March 31, 1996
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Total revenues increased 2.6% to $59.2 million for the first quarter of
1997 compared to $57.7 million for the same period of 1996. Restaurant
sales accounted for $1.4 million of this $1.5 million increase with
restaurant sales increasing to $57.3 million in the first quarter of 1997
from $55.9 million in the same period of 1996. Company-owned same restaurant
sales for the first quarter of 1997 were $231,000 compared to $221,000 for
the same period in 1996, an increase of 4.4%. The Company's positive results
in the first quarter reflect price increases, the implementation of new
advertising and promotional programs, continuing improvement in operations
execution at the restaurant level, and the mild winter weather in the
southeast in 1997 compared to 1996. The Company had 249 restaurants open
at the end of the first quarter of 1997 compared to 254 at the end of the
first quarter of 1996.
Franchise fees and royalties increased $97,000 to $748,000 in the first
quarter of 1997 versus the same period in 1996. The franchise system
had 90 restaurants open at the end of the first quarter of 1997 compared
to 80 open at the end of the first quarter of 1996. This increase in
franchise fees and royalties is a result of the increase in franchised
restaurants.
Other revenue, which comes from the Company's aviation subsidiary, was
$1.2 million in the first quarter of 1997 compared to $1.1 million in
the first quarter of 1996. This increase was a result of increased
fuel sales and hangar rental for the first quarter of 1997 compared
to the first quarter of 1996.
The average customer check for Company-owned full size restaurants in
the first quarter of 1997 was $3.71 as compared to $3.46 in the same
period of 1996, an increase of 7.2%. The average customer check for
Company-owned double drive-thru restaurants in the first quarter of
1997 was $4.04 as compared to $3.79 in the same period of 1996, an
increase of 6.6%. These increases in average customer check are due to
product prices increasing approximately 3.3% in the first quarter of
1997 over the same period in 1996, and introducing promotional products
and menu combinations which increased the average customer check.
Customer counts per restaurant day decreased to 674 in the first
quarter of 1997 compared to 686 in the same period of 1996, a decrease
of 1.7%. The customer count decline is partly attributable to a new cash
register being installed throughout the system which counts a customer with
each sale registered rather than each time the cash drawer is opened as the
prior register system did. Conversion was completed in 162 restaurants at
March 30, 1997, and management believes this change has reduced customer
counts approximately 1.5%, but produces a more accurate customer count.
Cost of restaurant sales increased $714,000, approximately 1.5%, to
$47.5 million in the first quarter of 1997, from $46.8 million in the
same period of 1996. Cost of restaurant sales as a percentage of
restaurant sales decreased to 82.9% in the first quarter of 1997 from
83.7% in the same period of 1996. Total food and paper costs were $18.3
million in the first quarter of 1997 as compared to $17.8 million in the
first quarter of 1996. Food and paper costs as a percentage of restaurant
sales increased to 32.0% in the first quarter of 1997 as compared to 31.8%
in the same period of 1996. Direct labor cost in the first quarter of 1997
was approximately the same in the first quarter of 1997 as in the same period
for 1996. Direct labor as a percent restaurant sales was 22.4% in the first
quarter of 1997 compared to 23.0% for the first quarter of 1996. Assistant
restaurant manager labor cost increased $249,000, approximately 9.6%.
Assistant restaurant manager labor cost as a percentage of restaurant sales
increased to 5.0% in the first quarter of 1997 from 4.7% in the same
period of 1996. As part of a plan to improve 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 decreased $17,000, approximately 1.0%, due to the
closing of certain restaurants during 1996.
Depreciation and amortization expenses decreased $180,000, approximately
6.4%, to $2.6 million in the first quarter of 1997 as compared to $2.8
million for the same period in 1996. This decrease in the first
quarter of 1997 is due to some assets being fully depreciated in late
1996 and the closing of certain restaurants in 1996.
General and administrative expenses increased by $277,000, approximately
4.3%, to $6.7 million in the first quarter of 1997 compared to $6.4 million
in the same period for 1996. Advertising expense was approximately $2.4
million in the first quarter of 1997 and the first quarter of 1996.
Advertising expense as a percentage of restaurant sales was 4.2% in
first quarter of 1997 and 4.3% in the first quarter of 1996. Salaries
were $1.9 million for the first quarter of 1997 and for the first quarter
of 1996.
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 incurred during the first quarter of 1997 was $719,000 compared to
$967,000 for the first quarter of 1996.
Due to the loss for the first quarter of 1997, an income tax benefit of
$27,000 was recorded for the quarter compared to the income tax benefit
of $455,000 for the first quarter of 1996. The effective tax rate of 38%
is the approximate combined statutory federal and state income tax rates.
The Company recorded a loss of $220,000, net of tax benefit, in the first
quarter of 1997 related to the early extinguishment of debt.
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, of which approximately $2.6 million
was paid during the first quarter of 1996; the remainder was paid as
due. While the Company was reorganizing under Chapter 11, it was
prohibited from paying interest or principal on pre-petition obligations
without the approval of the Bankruptcy Court. To the extent cash
generated from operations exceeded capital expenditures, working capital
requirements, payments approved by the Bankruptcy Court and
administrative expenses of the reorganization, the Company continued
to accumulate cash.
The terms and provisions of the reorganization plan were approved by the
Bankruptcy Court on April 10, 1997 and became effective April 23, 1997. As
discussed more fully in the Notes above, the confirmed plan provided for the
following:
- --term loans of $10.0 million and $20.0 million and a revolving loan of
$23.0 million effective April 23, 1997, and maturing April 23, 2002;
- --the payment of senior debt and secured debt totaling about $38.6 million
along with all past due interest and additional interest at 1.3% per annum;
- --the settlement of FLSA claims represented by class action suits and
totaling about $12.6 million with pro se claims settled for approximately
$100,000;
- --the payment of holders of approximately $7.0 million of trade claims of
100% of their claims with interest at 8.5% per annum for the period
December 15, 1995 - April 23, 1997.
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 $23.8 million of Liabilities Subject
to Compromise is classified as Current Liabilities at March 30, 1997 due
to the approved reorganization plan. The Company normally operates with
working capital deficits (current liabilities exceeding current assets),
and, as a result of the classification of certain Liabilities Subject to
Compromise as current liabilities, the Company had a working capital
deficit of $2.7 million at March 30, 1997 compared to a working capital
surplus of $12.4 million at March 31, 1996.
Capital expenditures totaled approximately $1.8 million in the first
quarter of 1997 compared to $548,000 for the same period in 1996. The
Company opened no new restaurants during the first quarter of 1997
or the first quarter of 1996. Approximately $7.6 million is budgeted for
capital expenditures in 1997 for refurbishing of certain restaurants
and ongoing capital improvements. The Company owns approximately 53.5%
of its restaurant sites and leases the remainder.
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).
Subsequent to December 29, 1996, Krystal and a majority of the FLSA
plaintiffs reached a settlement providing for the payment of approximately
$13,000,000 for FLSA claims and related legal costs. A plan for
reorganization was filed on February 24, 1997. On April 23, 1997, after
confirmation by the Bankruptcy Court, the plan of reorganization became final
resulting in the dismissal of the FLSA claims.
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 10-Credit Agreement dated as of April 22, 1997 between the
Company and TransAmerica Business Credit Corporation.
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-
A Form 8-K was filed on January 17, 1997 by the Registrant announcing
the agreement for the settlement of outstanding FLSA Claims.
Subsequent to the end of the first quarter, a Form 8-K was filed on
April 24, 1997 by the Registrant regarding the confirmation of the
Company's reorganization plan in the Chapter 11 proceedings which plan
incorporated the settlement of the outstanding FLSA claims.
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: 5/7/97 /s/Camden B Scearce
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Camden B. Scearce
(Vice President and Chief Financial
and Accounting Officer)