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 31, 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
- - ----------------------------------------------------------------------
(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
- - ----------------------------------------------------------------------
(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 May 6, 1996, 7,490,808 shares of the Registrant's Common
Stock were issued and outstanding.
<PAGE>
THE KRYSTAL COMPANY
-------------------
MARCH 31, 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 March 31, 1996
and December 31, 1995, and (2) the results of their operations, their
changes in common shareholders' equity and their cash flows for the
three months ended March 31, 1996 and April 2, 1995, have been included.
The results of operations for the interim period ended March 31, 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
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CONSOLIDATED BALANCE SHEETS
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(In thousands)
<CAPTION>
March 31, December 31,
1996 1995
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(Unaudited) (Audited)
<S> <C> <C>
ASSETS
- - -----------------
CURRENT ASSETS:
Cash and temporary investments $ 17,013 $ 13,713
Receivables 1,556 1,752
Income tax receivable 1,106 609
Net investment in direct financing
leases-current portion 838 856
Inventories 1,923 2,322
Deferred tax asset 5,553 5,553
Prepayments and other 607 830
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Total current assets 28,596 25,635
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NET INVESTMENT IN DIRECT FINANCING
LEASES, excluding current portion 678 867
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PROPERTY, BUILDINGS, AND EQUIPMENT, net 96,265 98,546
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LEASED PROPERTIES, net 1,809 1,863
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OTHER ASSETS:
Cash surrender value of life insurance 5,224 5,117
Other 649 667
------- -------
Total other assets 5,873 5,784
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TOTAL ASSETS $133,221 $132,695
======= =======
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
(In thousands)
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
- - ----------------------------------- ------- ---------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 3,469 $ 1,681
Accrued liabilities 11,425 9,427
Current portion of long-term debt 653 432
Current portion of capital
lease obligations 637 653
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Total current liabilities 16,184 12,193
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LIABILITIES SUBJECT TO COMPROMISE 54,319 56,909
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LONG-TERM DEBT, excluding current portion 3,383 3,621
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CAPITAL LEASE OBLIGATIONS, excluding
current portion 2,601 2,754
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DEFERRED INCOME TAXES 2,719 2,719
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OTHER LONG-TERM LIABILITIES 8,023 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, 7,514,808 shares
at March 31, 1996, and 7,526,808 shares
at December 31, 1995 40,738 40,830
Retained earnings 7,449 8,195
Deferred compensation (2,195) (2,378)
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Total shareholders' equity 45,992 46,647
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TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $133,221 $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
Months Ended,
--------------------
March 31, April 2,
1996 1995
-------- --------
<S> <C> <C>
REVENUES:
Restaurant sales $ 55,876 $ 56,040
Franchise fees 33 65
Royalties 618 512
Other revenues 1,140 1,579
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57,667 58,196
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COST AND OTHER EXPENSES:
Cost of restaurant sales 46,769 46,668
Depreciation and amortization
expenses 2,802 2,950
General and administrative
expenses 6,440 6,012
Other expenses, net 963 1,210
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56,974 56,840
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OPERATING INCOME 693 1,356
REORGANIZATION ITEM:
Professional fees ( 967) -
INTEREST EXPENSE ( 1,177) ( 1,090)
INTEREST INCOME 250 264
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INCOME(LOSS) BEFORE PROVISION FOR
(BENEFIT FROM) INCOME TAXES ( 1,201) 530
PROVISION FOR (BENEFIT FROM)
INCOME TAXES ( 455) 203
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NET INCOME(LOSS) $( 746) $ 327
======= =======
EARNINGS(LOSS) PER COMMON SHARE $( 0.10) $ 0.04
======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 7,522 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 THREE MONTHS ENDED
--------------------------
MARCH 31, 1996 AND APRIL 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 - ( 746) -
Forfeiture of 12,000 restricted
shares ( 92) - 92
Amortization of deferred
compensation - 91
------ ------ ------
BALANCE, March 31, 1996 $40,738 $ 7,449 $(2,195)
====== ====== ======
BALANCE, January 1, 1995 $40,909 $13,438 $(2,711)
Net income - 327 -
Amortization of deferred
compensation - - 113
------ ------ ------
BALANCE, April 2, 1995 $40,909 $13,765 $(2,598)
====== ====== ======
<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)
For the three months ended,
---------------------------
<CAPTION>
March 31, April 2,
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income(loss) $ ( 746) $ 327
Adjustments to reconcile net income(loss)
to net cash provided by operating
activities-
Depreciation and amortization 2,802 2,950
Decrease in receivables 196 128
(Increase) in income tax receivable ( 497) ( 140)
Decrease in inventories 399 73
Decrease in prepayments and other 223 206
Increase in accounts payable 1,788 342
(Decrease) in income taxes payable - ( 318)
Increase (Decrease) in accrued liabilities 1,998 ( 986)
Other 40 90
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Net cash provided by operating activities
before reorganization activities 6,203 2,672
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 3,613 2,672
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INVESTING ACTIVITIES:
Additions to property, buildings,
and equipment ( 548) ( 7,831)
Proceeds from sale of property,
buildings, and equipment 214 304
Payments received on net investment in
direct financing leases 207 182
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Net cash used in investing activities ( 127) ( 7,345)
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FINANCING ACTIVITIES:
Borrowings on bank revolving credit line - 1,469
Repayments of long-term debt ( 17) ( 172)
Principal payments of capital
lease obligations ( 169) ( 157)
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Net cash provided by (used in)
financing activities ( 186) 1,140
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NET INCREASE(DECREASE) IN CASH AND
TEMPORARY INVESTMENTS 3,300 ( 3,533)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 13,713 14,804
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CASH AND TEMPORARY INVESTMENTS,
end of period $17,013 $11,271
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 176 $ 1,114
Income taxes 38 544
Reorganization item: professional fees 196 -
======= =======
<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 $9,836,000 at March 31, 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.
Krystal is a debtor-in-possession for purposes of the bankruptcy case.
Currently, approximately 8,670 current or former employees have filed
claims in unspecified amounts alleging that they worked time for which
they were not compensated. Krystal expects to contest any claims which
it believes to be invalid. The Bankruptcy Court has established
<PAGE>
June 6, 1996, as the bar date by which all claimants must file their
claims or have them forever barred. Krystal will file a proposed
Chapter 11 Plan as soon as practicable thereafter. The four pending
lawsuits filed against Krystal under the FLSA have been stayed by the
bankruptcy filing.
The accrual for employee claims of $9,836,000 at March 31, 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 March 31, 1996
---------------------------------------------------
to the Three Months Ended April 2, 1995
---------------------------------------
Total revenues decreased 0.9% to $57.7 million for the first quarter
of 1996 compared to $58.2 million for the same period of 1995.
Restaurant sales accounted for $164,000 of this $529,000 decrease.
Company-owned average same restaurant sales for the first quarter of
1996 were $220,000 compared to $223,000 for the same period in 1995, a
decrease of 1.4%. The Company's management believes 1996 first quarter
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 254 restaurants open at the end of the first quarters of
1996 and 1995.
Franchise fees and royalties increased $74,000 to $651,000 in the first
quarter of 1996 versus the same period in 1995. The franchise
system had 80 restaurants open at the end of the first quarter of 1996
compared to 65 open at the end of the first 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 $1.1 million in the first quarter of 1996 compared to $1.6 million
in the first 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 first quarter of 1996 was $3.46 as compared to $3.37 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 quarter of 1996
was $3.79 as compared to $3.71 in the same period of 1995, an increase
of 2.2%. The changes in average customer check is due to product prices
increasing approximately 2.0% in the first quarter of 1996 over the same
period in 1995, and a change in customer purchasing patterns. Customer
counts per restaurant day decreased to 686 in the first quarter of 1996
compared to 715 in the same period of 1995, a decrease of 4.1%.
Cost of restaurant sales increased $101,000, approximately 0.2%, to
$46.8 million in the first quarter of 1996, from $46.7 million in the
same period of 1995. Cost of restaurant sales as a percentage of
restaurant sales increased to 83.7% in the first quarter of 1996 from
<PAGE>
83.3% 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 $17.8 million in the first quarter of 1996 as compared to
$17.7 million in the first quarter of 1995. Food and paper costs as a
percentage of restaurant sales increased to 31.8% in the first quarter
of 1996 as compared to 31.5% in the same period of 1995. Direct labor
cost increased $129,000 in the first quarter of 1996, approximately
1.0%, to 23.0% of restaurant sales in the first quarter of 1996, versus
22.7% in the first quarter of 1995. Assistant restaurant manager labor
cost increased $72,000, approximately 2.8%. Assistant restaurant
manager labor cost as a percentage of restaurant sales increased to 4.7%
in the first quarter of 1996 from 4.5% in the same period of 1995.
Restaurant manager labor cost increased $32,000, approximately 1.8%, due
to average salary increases for the first quarter of 1996.
Depreciation and amortization expenses decreased $148,000, approximately
5.0%, to $2.8 million in the first quarter of 1996 as compared to $3.0
million for the same period in 1995. The decrease in the first quarter
of 1996 is due to some assets being fully depreciated in late 1995.
General and administrative expenses increased by $428,000,
approximately 7.1%, to $6.4 million in the first quarter of 1996 as
compared to $6.0 million in the same period of 1995. Advertising
expense was approximately $2.4 million in the first quarter of 1996
and the first quarter of 1995. Advertising expense as a percentage of
restaurant sales was 4.3% in the first quarter of 1996 and in the first
quarter of 1995. Salaries increased $179,000, approximately 10.4%, to
$1.9 million in the first quarter of 1996 from $1.7 million in the same
period of 1995. The 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 quarter of 1996 was
$967,000.
Due to the loss for the first quarter of 1996, an income tax benefit of
$455,000 was recorded for the quarter as compared to income tax expense
of $203,000 for the previous year's first quarter. 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, of which approximately $2.6 million
was paid during the first quarter of 1996; the remainder will be paid as
due. While the Company is reorganizing under 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 unclear 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
receivables since substantially all of its restaurants' sales are for
cash. The Company's receivables from franchisees are closely monitored
and collected weekly. Approximately $21.3 million of liabilities
classified as Liabilities Subject to Compromise after the Chapter 11
filing would otherwise be classified as Current Liabilities at
March 31, 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 $12.4 million at March 31, 1996 compared to a working capital
deficit of $5.6 million at April 2, 1995.
Capital expenditures totaled approximately $548,000 in the first quarter
of 1996 compared to $7.8 million for the same period in 1995. The
Company opened no new restaurants during the first quarter of 1996
compared to 3 new restaurants opened and 3 under construction during the
first quarter 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 53.5%
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.
<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. Currently approximately 8,670
current and former employees have filed claims 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.
Under the bankruptcy proceedings, current and former employees will be
required to file claims by June 6, 1996 or forever have these claims
barred. The Company will file a proposed Chapter 11 Plan as soon as
practicable thereafter. 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 unclear 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 first 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: 5/6/96 Camden B. Scearce
- - -------------- ------------------------
Camden B. Scearce
(Vice President and Chief Financial
and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 17013
<SECURITIES> 0
<RECEIVABLES> 2668
<ALLOWANCES> 6
<INVENTORY> 1923
<CURRENT-ASSETS> 28596
<PP&E> 173213
<DEPRECIATION> 76948
<TOTAL-ASSETS> 133221
<CURRENT-LIABILITIES> 16184
<BONDS> 2405
0
0
<COMMON> 40738
<OTHER-SE> 5254
<TOTAL-LIABILITY-AND-EQUITY> 133221
<SALES> 55876
<TOTAL-REVENUES> 57667
<CGS> 46769
<TOTAL-COSTS> 56011
<OTHER-EXPENSES> 963
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1177
<INCOME-PRETAX> (1201)
<INCOME-TAX> (455)
<INCOME-CONTINUING> (746)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (746)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
