FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
---- ----
As of August 8, 1996, 7,491,768 shares of the Registrant's Common
Stock were issued and outstanding.
<PAGE>
THE KRYSTAL COMPANY
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June 30, 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 June 30, 1996
and December 31, 1995, (2) the results of their operations, their
changes in common shareholders' equity and their cash flows for the
six months ended June 30, 1996 and July 2, 1995, and (3) the results
of their operations for the three months ended June 30, 1996 and
July 2, 1995 have been included. The results of operations for the
interim period ended June 30, 1996 are not necessarily indicative of
the results for the full year.
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
-----------------------------
Item I. Financial Statements
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
<CAPTION>
June 30, December 31,
1996 1995
-------- ---------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
- -----------------
CURRENT ASSETS:
Cash and temporary investments $ 19,961 $ 13,713
Receivables 1,996 1,752
Income tax receivable 888 609
Net investment in direct financing
leases-current portion 770 856
Inventories 2,034 2,322
Deferred tax asset 5,553 5,553
Prepayments and other 1,272 830
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Total current assets 32,474 25,635
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NET INVESTMENT IN DIRECT FINANCING
LEASES, excluding current portion 532 867
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PROPERTY, BUILDINGS, AND EQUIPMENT, net 94,442 98,546
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LEASED PROPERTIES, net 1,756 1,863
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OTHER ASSETS:
Cash surrender value of life insurance 5,332 5,117
Other 742 667
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Total other assets 6,074 5,784
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TOTAL ASSETS $135,278 $132,695
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<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
(In thousands)
<CAPTION>
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
- ----------------------------------- ------- ---------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 3,163 $ 1,681
Accrued liabilities 13,170 9,427
Current portion of long-term debt 751 432
Current portion of capital
lease obligations 588 653
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Total current liabilities 17,672 12,193
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LIABILITIES SUBJECT TO COMPROMISE 54,366 56,909
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LONG-TERM DEBT, excluding current portion 3,273 3,621
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CAPITAL LEASE OBLIGATIONS, excluding
current portion 2,479 2,754
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DEFERRED INCOME TAXES 2,719 2,719
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OTHER LONG-TERM LIABILITIES 8,269 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 June 30, 1996, and 7,526,808 shares
at December 31, 1995 40,556 40,830
Retained earnings 7,875 8,195
Deferred compensation (1,931) (2,378)
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Total shareholders' equity 46,500 46,647
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TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $135,278 $132,695
======= =======
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands, except per share data)(Unaudited)
<CAPTION>
For The Three For The Six
Months Ended, Months Ended,
------------------ -------------------
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Restaurant sales $ 58,867 $ 61,269 $114,743 $117,309
Franchise fees 89 163 122 228
Royalties 690 577 1,308 1,089
Other revenues 1,257 1,492 2,397 3,071
------- ------- ------- -------
60,903 63,501 118,570 121,697
------- ------- ------- -------
COST AND OTHER EXPENSES:
Cost of restaurant sales 48,471 49,942 95,240 96,610
Depreciation and amortization
expenses 2,800 3,121 5,602 6,071
General and administrative
expenses 6,549 6,465 12,989 12,477
Other expenses, net 988 1,155 1,951 2,365
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58,808 60,683 115,782 117,523
------- ------- ------- -------
OPERATING INCOME 2,095 2,818 2,788 4,174
REORGANIZATION ITEM:
Professional fees and
other expenses ( 545) - ( 1,512) -
INTEREST EXPENSE ( 1,004) ( 1,026) ( 2,013) ( 2,116)
INTEREST INCOME 144 166 226 430
------- ------- ------- -------
INCOME(LOSS) BEFORE PROVISION FOR
(BENEFIT FROM) INCOME TAXES 690 1,958 ( 511) 2,488
PROVISION FOR (BENEFIT FROM)
INCOME TAXES 264 743 ( 191) 946
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NET INCOME(LOSS) $ 426 $ 1,215 $( 320) $ 1,542
======= ======= ======= =======
EARNINGS(LOSS) PER COMMON SHARE $ 0.06 $ 0.16 $( 0.04) $ 0.21
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 7,492 7,511 7,507 7,510
======= ======= ======= =======
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE SIX MONTHS ENDED
------------------------
JUNE 30, 1996 AND JULY 2, 1995
------------------------------
(In thousands)
(Unaudited)
<CAPTION>
Common Retained Deferred
Stock Earnings Compensation
------ -------- ------------
<S> <C> <C> <C>
BALANCE, December 31, 1995 $40,830 $ 8,195 $(2,378)
Net loss - ( 320) -
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 - - 173
------ ------ ------
BALANCE, June 30, 1996 $40,556 $ 7,875 $(1,931)
====== ====== ======
BALANCE, January 1, 1995 $40,909 $13,438 $(2,711)
Net income - 1,542 -
Issuance of 1,440 common shares
to management and non-employee
directors under restricted
stock plan 11 - ( 11)
Tax benefit of restricted
stock vested - 81 -
Amortization of deferred
compensation - - 229
------ ------ ------
BALANCE, July 2, 1995 $40,920 $15,061 $(2,493)
====== ====== ======
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(Unaudited)
<CAPTION>
For The Six Months Ended,
---------------------------
June 30, July 2,
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income(loss) $ ( 320) $ 1,542
Adjustments to reconcile net income(loss)
to net cash provided by operating
activities-
Depreciation and amortization 5,602 6,071
(Increase)decrease in receivables ( 244) 141
(Increase) in income tax receivable ( 279) ( 468)
Decrease in inventories 288 63
(Increase) in prepayments and other ( 442) ( 382)
Increase (decrease)in accounts payable 1,482 (1,847)
(Decrease) in income taxes payable - ( 318)
Increase (decrease) in accrued liabilities 3,743 ( 350)
Other 1 250
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Net cash provided by operating activities
before reorganization activities 9,831 4,702
Changes in liabilities from reorganization
activities:
(Decrease) in accrued liabilities (2,543) -
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Net cash provided by operating activities 7,288 4,702
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INVESTING ACTIVITIES:
Additions to property, buildings,
and equipment (2,211) (12,380)
Proceeds from sale of property,
buildings, and equipment 1,119 481
Payments received on net investment in
direct financing leases 421 370
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Net cash used in investing activities ( 671) (11,529)
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FINANCING ACTIVITIES:
Repayments of long-term debt ( 29) ( 3,272)
Principal payments of capital
lease obligations ( 340) ( 317)
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Net cash used in financing activities ( 369) ( 3,589)
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NET INCREASE(DECREASE) IN CASH AND
TEMPORARY INVESTMENTS 6,248 (10,416)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 13,713 14,804
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CASH AND TEMPORARY INVESTMENTS,
end of period $19,961 $ 4,388
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 309 $ 2,238
Income taxes 127 1,635
Reorganization item: professional fees
and other expenses 327 -
======= =======
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
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 June 30, 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 in unspecified
amounts alleging that they worked time for which they were not
compensated. The FLSA claimants are required to amend their claims by
<PAGE>
August 13, 1996 to specify the amounts they allege they are owed by the
Company. 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. The Company is
also committed to contest any FLSA claims which it believes to be
invalid.
The accrual for employee claims of $9,822,000 at June 30, 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Comparison of the Three Months Ended June 30, 1996
--------------------------------------------------
to the Three Months Ended July 2, 1995
--------------------------------------
Total revenues decreased 4.1% to $60.9 million for the second quarter of
1996 compared to $63.5 million for the same period of 1995. Restaurant
sales accounted for $2.4 million of this $2.6 million decrease.
Company-owned average same restaurant sales for the second quarter of
1996 were $235,000 compared to $241,000 for the same period in 1995, a
decrease of 2.6%. The Company's management believes 1996 second quarter
results reflect a continuing softness in the fast food industry
resulting in widespread heavy sales discounting throughout the industry.
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 251 restaurants open at
the end of the second quarter of 1996 compared to 255 at the end of the
second quarter of 1995.
Franchise fees and royalties increased $39,000 to $779,000 in the second
quarter of 1996 versus the same period in 1995. The franchise system
had 84 restaurants open at the end of the second quarter of 1996
compared to 69 open at the end of the second quarter of 1995. 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
$1.3 million in the second quarter of 1996 compared to $1.5 million in
the second quarter of 1995. This decline was a result of discontinued
outside parts sales and a decrease in maintenance revenues.
The average customer check for Company-owned full size restaurants in
the second quarter of 1996 was $3.52 as compared to $3.44 in the same
period of 1995, an increase of 2.3%. The average customer check for
Company-owned double drive-thru restaurants in the second quarter of
1996 was $3.82 as compared to $3.77 in the same period of 1995, an
increase of 1.3%. The changes in average customer check are due to
product prices increasing approximately 1.8% in the second quarter 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 721 in the second
quarter of 1996 compared to 760 in the same period of 1995, a decrease
of 5.1%.
<PAGE>
Cost of restaurant sales decreased $1.5 million, approximately 2.9%, to
$48.5 million in the second 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 82.3% in the second quarter of 1996 from
81.5% 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 $18.3 million in the second quarter of 1996 as compared to
$18.8 million in the second quarter of 1995. Food and paper costs as a
percentage of restaurant sales increased to 31.1% in the second quarter
of 1996 as compared to 30.7% in the same period of 1995. Direct labor
cost decreased $554,000 in the second quarter of 1996, approximately
4.0%, to 22.5% of restaurant sales in the second quarter of 1996, the
same percentage as in the second quarter of 1995. Assistant restaurant
manager labor cost increased $161,000, approximately 6.6%. Assistant
restaurant manager labor cost as a percentage of restaurant sales
increased to 4.4% in the second 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 $35,000, approximately 2.0%, due to average
salary increases for the second quarter of 1996.
Depreciation and amortization expenses decreased $321,000, approximately
10.3%, to $2.8 million in the second quarter of 1996 as compared to $3.1
million for the same period in 1995. This decrease in the second
quarter of 1996 is due to some assets being fully depreciated in late
1995.
General and administrative expenses were approximately $6.5 million in
the second quarters of 1996 and 1995. Advertising expense was
approximately $2.6 million in the second quarters of 1996 and 1995.
Advertising expense as a percentage of restaurant sales was 4.4% in the
second quarter of 1996 compared to 4.3% in the same period of 1995.
Salaries increased $110,000, approximately 6.2%, to $1.9 million in the
second quarter of 1996 from $1.8 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.
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 second quarter of 1996 was
$545,000.
Provision for income taxes decreased to $264,000 in the second quarter
of 1996 from $743,000 in the same period of 1995. The effective tax
rate of 38% is the approximate combined statutory federal and state
income tax rates.
<PAGE>
Comparison of the Six Months Ended June 30, 1996
------------------------------------------------
to the Six Months Ended July 2, 1995
------------------------------------
Total revenues decreased 2.6% to $118.6 million for the first half of
1996 compared to $121.7 million for the same period of 1995. Restaurant
sales accounted for $2.6 million of this $3.1 million decrease.
Company-owned average same restaurant sales for the first half of 1996
were $456,000 compared to $465,000 for the same period in 1995, a
decrease of 2.0%. The Company's management believes 1996 first half
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 251 restaurants open at the end of the first half of 1996
compared to 255 at the end of the first half of 1995.
Franchise fees and royalties increased $113,000 to $1.4 million in the
first half of 1996 versus the same period in 1995. The franchise system
had 84 restaurants open at the end of the first half of 1996 compared to
69 open at the end of the same period in 1995. 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
$2.4 million in the first half of 1996 compared to $3.1 million in the
same period of 1995. This decline was a result of discontinued outside
parts sales and a decrease in maintenance revenues.
The average customer check for Company-owned full size restaurants in
the first half of 1996 was $3.49 as compared to $3.40 in the same period
of 1995, an increase of 2.7%. The average customer check for
Company-owned double drive-thru restaurants in the first half of 1996
was $3.81 as compared to $3.74 in the same period of 1995, an increase
of 1.9%. The changes in average customer check are due to product
prices increasing approximately 1.9% in the first half 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 703 in the first half of 1996
compared to 737 in the same period of 1995, a decrease of 4.6%.
Cost of restaurant sales decreased $1.4 million, approximately 1.4%, to
$95.2 million in the first half of 1996, from $96.6 million in the same
period of 1995. Cost of restaurant sales as a percentage of restaurant
sales increased to 83.0% in the first half of 1996 from 82.4% 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 $36.1 million in the first half of 1996 as compared to $36.5
million in the first half of 1995. Food and paper costs as a percentage
of restaurant sales increased to 31.5% in the first half of 1996 as
compared to 31.1% in the same period of 1995. Direct labor cost
<PAGE>
decreased $425,000 in the first half of 1996, approximately 1.6%, to
22.7% of restaurant sales in the first half of 1996, versus 22.6% in the
same period of 1995. Assistant restaurant manager labor cost increased
$233,000, approximately 4.7%. Assistant restaurant manager labor cost
as a percentage of restaurant sales increased to 4.6% in the first half
of 1996 from 4.3% 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
$67,000, approximately 1.9%, due to average salary increases for the
first half of 1996.
Depreciation and amortization expenses decreased $469,000, approximately
7.7%, to $5.6 million in the first half of 1996 as compared to $6.1
million for the same period in 1995. This decrease in the first half of
1996 is due to some assets being fully depreciated in late 1995.
General and administrative expenses increased by $512,000, approximately
4.1%, to $13.0 million in the first half of 1996 versus $12.5 million in
the same period of 1995. Advertising expense was approximately $5.0
million in the first half of 1996 as compared to $5.1 million in the
same period of 1995. Advertising expense as a percentage of restaurant
sales was 4.4% in the first half of 1996 compared to 4.3% in the same
period of 1995. Salaries increased $289,000 approximately 8.2%, to $3.8
million in the first half of 1996 from $3.5 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.
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 half of 1996 was
$1.5 million.
Due to the loss for the first half of 1996, an income tax benefit of
$191,000 was recorded for that period as compared to income tax expense
of $946,000 for the previous year's first half. The effective tax rate
of 38% is the approximate combined statutory federal and state income
tax rates.
<PAGE>
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 half 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.
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 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 $26.9 million of liabilities
classified as Liabilities Subject to Compromise after the Chapter 11
filing would otherwise be classified as Current Liabilities at
June 30, 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 $14.8 million at June 30, 1996 compared to a working capital
deficit of $8.3 million at July 2, 1995.
Capital expenditures totaled approximately $2.2 million in the first
half of 1996 compared to $12.4 million for the same period in 1995. The
Company opened no new restaurants during the first half of 1996 compared
to six new restaurants opened during the same period of 1995.
Approximately $7.0 million is budgeted for capital expenditures in 1996
for refurbishing of certain restaurants and ongoing capital
improvements. The Company owns approximately 53.8% 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.
<PAGE>
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 in
unspecified amounts 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 second quarter of 1996 by the
Registrant.
<PAGE>
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
THE KRYSTAL COMPANY
(Registrant)
Dated: 8/8/96 Camden B. Scearce
- -------------- ------------------------
Camden B. Scearce
(Vice President and Chief Financial
and Accounting Officer)
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